Re: Today's Wall Street Journal Editorial

[Sven R Larson <larson@xxxxxx>]

I think Reagan at some point said that the budget deficit is big enough
to take care of itself. Anyway. the WJS editorial shouldn't really
surprise anyone. Last fall's US presidential election campaign showed
clearly that fiscal prudence is nowadays a virtue of democrats and other
friends of the working masses, not of the conservative right. This is
pretty much the same trend as here in Europe, where social democrats and
other friends of the working masses have excelled in budget balancing
and debt and deficit reduction for quite a while now. Remember that the
incumbent EU commission that banned Ireland for its lax fiscal policy
attitude was appointed at a time when almost all EU member states were
governed by social democrats and other friends of the working masses.
Capitalists know very well what good comes out of a large, very liquid
bond market. They know that without a solid government bond market the
financial system would be a much more unstable and risky place to be.
I'm pretty sure right-wingers on both sides of the Atlantic will begin
to speak of the bond market's good in the next couple of years, and that
it needs to be saved. They will become more "keynesian" - the catch will
probably be that you can't cut taxes for the rich without both giving
something to the poor and at the same time preserving public spending
pretty much intact. If you can pursue a GW Bush-style tax cut without
scaring people off into the arms of democrats and other friends of the
working masses, you can actually combine a conservative government with
lower taxes for rich dudes AND a happy people.

That will be a hard nut to crack for democrats and other friends of the
working masses.


Progressively Keynesian,

/srl

Goncalo Fonseca wrote:
>
> Doesn't this argument sound familiar?  It's from today's Wall Street Journal
> (in case you missed it).
>
> http://www.opinionjournal.com/editorial/feature.html?id=85000758
>
>                 When Debt Is Good
>
> Don't worry about what the government owes. What it takes is much more
> important.
>
> Tuesday, March 27, 2001 12:01 a.m.
>
> If four separate opinion polls all found that 75% of the American people
> thought Members of Congress should eat Mom's apple pie for lunch every day,
> Congress would cram down apple pie unto eternity. Similarly, opinion polls
> of yore asked the American people the same apple-pie question about paying
> down the national debt, and by golly, the people said yes and by golly,
> Congress is going to cram down the national debt come rain or come shine.
>
> Thing is, we've had both rain and shine and have now paid off as much of the
> national debt as is prudent or sensible. Yet even Democrats are professing
> belief in debt payoff, proving conclusively it's now not much more than a
> Beltway totem pole. We return to this piece of nonsense because the national
> debt pay-down is starting to get in the way of things that the public might
> actually want from Congress, such as long overdue tax cuts or Social
> Security reform. Nearly all current tax-cut proposals are tethered to some
> arcane interplay between surplus projections and national-debt repayment.
>
> At its most simplistic, this idea stays afloat because of the attractive
> metaphor that paying down the debt is like Americans paying down their home
> mortgages.
>
> It isn't. The American family is not remotely like the federal government.
> As far as we know, no family has the power to back up its debt by printing
> money or taxing citizens.
>
> The only point of similarity between mortgage debt and the national
> debt--and it is an important one--is that both financial instruments make
> excellent sense. It is a refinement, not a curse, of the financial markets
> that Americans can borrow to buy a house instead of waiting a zillion years
> to make that purchase in cash. Ditto for the ability of the government to
> borrow funds to buy highways, aircraft carriers and parks instead of
> plunking down the requisite cash; for purposes of public finance, these are
> assets suitable for depreciating over their life cycle.
>
> In fact, the moment has arrived to praise the existence of the national debt
> as a positive force for economic growth. Currently, the debt-to-GDP ratio is
> around 35%. That's about half the average of other industrial economies and
> well below a ratio of 50%, the point beyond which many economists argue that
> the size may become worrisome.
>
> Here, then, are good reasons for Congress to get over the debt neurosis:
>
> The national debt, which expresses itself in the form of Treasury
> securities, functions as a crucial cog in the world financial mechanism.
> Since Treasury securities represent claims on the U.S. government, they are
> therefore backed by the money-printing and taxing power of the government
> and are considered stable and risk-free assets.
>
> This makes Treasury securities perfect benchmarks against which other assets
> and derivatives can be priced. Banks use them as part of their capital
> accounts, and pension funds pour them into portfolios to satisfy prudential
> regulations. Anything that makes global financial markets more efficient is
> good for growth, and that includes U.S. debt. The IMF, an organization that,
> one would think, has a huge stake in the efficiency of world financial
> markets, recently gummed this issue to a pulp in a report titled, "Financial
> Implications of the Shrinking Supply of U.S. Treasury Securities."
>
> The national debt, to the extent it represents long-term borrowing and
> investment on depreciable infrastructure, can go toward creating,
> maintaining and improving the wherewithal necessary for high-level economic
> functioning. To the degree it substitutes for higher taxes, national debt
> frees money to be directed by the market into productive endeavors. Money
> that doesn't go to Washington can find its way into capacity-creating,
> job-creating investments in the private sector. This is true as well for tax
> cuts--money that doesn't go to paying down the debt. The economy will
> experience higher growth from cuts in marginal tax rates than it will from
> lower or zero national debt.
>
> If the surplus is returned to taxpayers, instead of paying off the debt, the
> economy could be several trillion dollars richer when the boomers start to
> retire and the Social Security pay-as-you-go fund runs dry. (That's when the
> Social Security trust fund antes up those bogus bonds from the bogus lockbox
> and the true situation is revealed; to wit, in order to redeem these pieces
> of paper, the federal government will either have to raise taxes, issue new
> debt or cut spending.) An economy that has been boosted by an extra several
> trillion dollars would really come in handy, since the goods and services
> promised to the boomers will have to come out of resources then available.
>
> Finally, if the debt is paid down to zero, the government, after 2011, is
> likely to start investing any surpluses in private assets. The government
> could own chunks of corporations. Congress, with money in play, would be
> tempted. Why take that chance?
>
> The issue before us, including Congress, is economic growth. The solution
> won't be found in ancient opinion polls on the national debt. The solution
> will be found in reducing the burden of taxation on productive Americans.

--
Sven R Larson
PhD; Assistant professor of economics
Department of Social Sciences, Bldg. 22.2
Roskilde University
Pb 260
DK-4000 Roskilde, Denmark
Phone: (+45) 4674 2910