>Date: Tue, 12 Mar 1996 19:48:24 -0800 >From: jmlib (jmlib) >To: libprofs >Subject: Federal Debt okay (fwd) [One of the mailing lists I run is for students of General Semantics, which is an interesting applied scientific epistemology, but the field has largely been overrun by those who prefer a collectivist ethics-politics. Here is a sample post from one of the main contributors and he seems to imply that all this complaining about the Federal Debt amounts to nothing ...] ------------------------------------------------------------------------- Nearly all my sentient life I have been exposed to scare stories about the impact of the U.S. Federal government's chronic deficit spending. The usual scenarios involve skyrocketing interest rates, dramatically-reduced real standards of living, stock market collapse and, as if we needed more, national bankrupcy for our children. These national fears extend back to before my lifetime. Franklin Roosevelt's attempt to use deficit spending to fight the depression of the 1930s triggered so much alarm throughout the nation ("President Fraudulent Deficit Russiavelt" they called him) that soon, and prematurely, the Roosevelt administration backed away from its deficit spending and the economy took another turn for the worse. It wasn't until the massive deficit spending of World War II that the United States was able to climb out of the Depression. Not only did the United States survive the massive deficit spending of World War II, we entered an era of unprecedented economic growth. The warnings about the effects of massive deficit spending did not come true. Nevertheless, the terrorists who make their living by agitating the public over hypothetical risks kept right on spinning their tales of woe, much like a rabid fundamentalist preacher who shows up for the next sermon unrepentent after again wrongly predicting the demise of the world. One of the ironies of Ronald Reagan's presidency was that Reagan had been elected in part because of the fears he had stoked regarding the growing national debt and his promises to do something about the deficit. The irony is that the national debt grew far more during his 8 years in office than it had in the 8 years of his predecessors, and has continued to do so since he left office. Who would have thought in 1981 that in 15 years the Federal debt would grow from $1 trillion to almost $5 trillion! Little doubt that if this scenario had been suggested to the Reaganites back in 1981 they almost surely would have predicted economic catastrophe for U.S. Incredibly, what we find today is just the opposite. Unemployment, inflation and interest rates are low, the stock market is at record highs, and community colleges are begging for students. One hardly needs to be a general semanticist to see that the deficit/debt catastrophists have been sorely lacking in their predictability. The question for us is "Why?" It seems only common sense that if you chronically spend more than you take in you will eventually have to meet your creditors in court, to be stripped of your worldly goods and left homeless on the street. What many have not realized is that the scenario that applies to an individual or individual business need not apply to a nation. If I borrow money for, say, a wild time at one of Steve Stockdale's parties, and cannot repay my debt, my creditors can indeed come after me and confiscate what goods I have. I may try to protect what I have by declaring "bankruptcy," allowing me to discharge my debts without necessarily paying them. The United States, on the other hand, has some advantages that individual Americans do not have. The Federal government can "borrow" from the Federal Reserve System. Although this procedure is usually labelled "borrowing," in reality the Federal government creates money and expands the money supply through this type of financing. Individuals, states and businesses do not enjoy this luxury. When the Federal government expands the money supply through deficit financing, more funds can be made available for increasing production of goods and services, and for the public to purchase those goods and services. Occasionally one hears quaint stories of school children sending their allowances or earnings from a bake sale to the Federal government to help it pay off its debts. An individual may free up income for other uses once he has paid off his debts. However, since much of the Federal debt is held by no one in particular ... just the Federal Open Market Committee of the Federal Reserve Board, any serious attempt to "pay off the Federal debt" would have to mean much higher taxes and shrinkage of the money supply. Both would leave us worse off economically. The reason our catastrophic expectations regarding the Federal debt have not materialized is that we have tried to apply the economics of the individual to the economics of the nation. This is a confusion of the levels of organization as well as a confusion of the orders of abstraction. The Federal government is more than just a big version of Mom and Pop's Bakery. In Korzbyskian terms, we are dealing here with intensional evaluations of "business," "deficit," "debt," "borrowing," "bankruptcy" .... We project our generalizations from areas of personal and business finance to an area where they do not apply. We do not properly evaluate the differences, and so we have little predictability. If this application of general semantics interests you I recommend you read: "How Real is the Federal Deficit" by Robert Eisner. (Eisner is professor of economics at Northwestern University and a columnist for the Wall Street Journal.) "The Debt and the Deficit" by Robert Heilbroner and Peter Bernstein "A Random Walk Down Wall Street" by Burton G. Malkiel "Money to Grow On" by Stuart Chase Stuart Chase, of course, was Korzybski's first popularizer and my first mentor in general semantics. Thanks, Stuart! ====================================================================== >Date: Tue, 12 Mar 1996 22:08:03 -0800 (PST) >From: Annelise Anderson >Subject: Re: Federal Debt okay (fwd) >To: jmlib >Cc: libprofs It would be an interesting exercise (perhaps for graduate students) to demonstrate the massive ignorance and errors in this post on the unimportance of the federal debt. I don't particularly want to do that here, but just to point out that in any course I ever gave this kid would get an F. Annelise ====================================================================== >From: dbrlogos@panix.com >Date: Wed, 13 Mar 1996 09:47:00 -0500 (EST) >Subject: Federal Debt okay (fwd) >To: jmlib (jmlib) >The reason our catastrophic expectations regarding the Federal debt have not >materialized is that we have tried to apply the economics of the individual >to the economics of the nation. This is a confusion of the levels of >organization as well as a confusion of the orders of abstraction. The >Federal government is more than just a big version of Mom and Pop's Bakery. >In Korzbyskian terms, we are dealing here with intensional evaluations of >"business," "deficit," "debt," "borrowing," "bankruptcy" .... We project >our generalizations from areas of personal and business finance to an area >where they do not apply. We do not properly evaluate the differences, and so >we have little predictability. The above paragraph is, I assume, the "argument" for assuming that Federal Debt is okay. Very generally speaking, the argument seems to be this: persons who worry about the Federal debt fail to realize that words like "debt" can be used in either a distributive or a collective sense and thus they commit the "fallacy of composition" when they assume that what is true for the distributive sense of a term (e.g., personal debt is bad) must be also true for the collective sense of a term (e.g. Federal debt is bad). People who worry about Federal Debt commit an informal logical fallacy. Now, I first heard this argument nearly thirty years ago in both logic and economics classes. The reasoning of people who worry about the Federal Debt was likened to those who believe that since each player on the team is not the best player at his position in the league, therefore, the team is not the best team in the league. I think this example was used the year the METS won their first World Series. Now, I think there are loads of problems with this argument, for one thing the analogy does not go through. Is Federal Debt National Debt? Also, sometimes it is okay to reason from part to whole, e.g., since every wool fiber of this rug is green, we may say, therefore, that this wool rug is green. Yet, since I am not an economist, I would like to see what economists have to say about the "argument" in the above paragraphs. Also, for the metaphysicians in the group, there are also interesting questions regarding the relationship of parts to wholes. Is a whole more than the sum of its parts? Is the "more" the relationships that the parts have to each other or are the relationships included in the whole as parts? Does the extension of microeconomic (Do economists still use this label?) principles to the economy as a whole require ignoring the relationships that parts have to parts? Furthermore, when one starts talking about a national economy, what is a "part"? Issues of holism and organicism seem to be lurking here. But is a national economy merely to be explained in a mechanistic manner? Further, what is the ontological status of aggregates? Do they have causal efficacy? Ultimately, how does an economist sophisticated in methodological issues address these questions? References please. Douglas Rasmussen ====================================================================== >From: "Roger W. Garrison EC" >To: libprofs >Date: Wed, 13 Mar 1996 10:53:20 CST >Subject: Federal Debt Thanks to John for sharing a General Semanticist's view of government debt. Unfortunately, the idea that the debt is nothing to worry about is common among economists, too--even among market- oriented economists. Supply-sider Robert Bartley, for instance, celebrates Reagan's debt-driven boom in his (1992), and he's still downplaying the debt in his WSJ editorials (See, for instance, "It's Ideas, Stupid!" 2/28/96). Milton Friedman argues that the deficit is a secondary issue--so much so as to constitute a red herring: What matters is government spending; how the spending is financed (by taxing or by borrowing) matters much less. Friedman, of course, has a point. Although we talk about the "tax burden," government spending is a better measure of the true burden of government on the economy. Also, if we had to choose between a balanced budget involving high levels of spending and taxing and an unbalanced budget involving a low level of spending and a lower level of taxing, we would have no trouble choosing the latter. Even conceding Friedman's points, we can still make a strong case that *chronically large* deficits do harm to the economy beyond the additional government spending that they finance. That is, at some extreme of budgetary imbalance, the method of finance does matter. The key difference is reflected in the difference between the tax code and the (nonexistent) "deficit code." Granted, the tax code is outrageously complex and changes all too often, but there is no deficit code at all. How does the government fill the gap between its taxing and its spending? If it borrows from the Federal Reserve, we'll have inflation; if it borrows domestically, we'll have high (real) interest rates; if it borrows abroad, we'll have weak export markets. The fact that no one of these consequences is *systematically* associated with high deficits is used by some (the supply-siders) as evidence that the deficit is no problem after all. More plausibly, however, we can argue that the lack of predictability- -the absence of a deficit code--is the essence of the problem. The fact that market participants have to guess about the deficit's impact on future market conditions means a higher level of uncertainty in the private sector and a correspondingly lower level of economic coordination. In an era of deficit finance, investors/entrepreneurs/speculators have to make guesses about how the government's borrowing strategy, and if they guess wrong, they lose big. Further, debt-driven booms, such as we experienced in the 1980s, have a strong parallel to the money-driven boom of the 1920s. Generalizing from the work of F. A. Hayek, we can say that an artificial boom, whether driven by money or by debt, leads inevitably to a bust. These are the themes that I have developed in my own writing on the deficit: Roger W. Garrison, "Public-Sector Deficits and Private-Sector Preformance," in Lawrence H. White, ed., , New York University Press, 1993. Roger W. Garrison, "The Roaring Twenties and the Bullish Eighties: The Role of The Government in Boom and Bust," , vol. 7, no. 2-3, 1993. Roger W. Garrison Department of Economics Auburn University Auburn, AL 36849 ====================================================================== >From: hanson@hss.caltech.edu (Robin Hanson) >Date: Wed, 13 Mar 96 11:13:51 PST >To: libprofs >Cc: hanson@hss.caltech.edu, "Roger W. Garrison EC" >Subject: Federal Debt "Roger W. Garrison EC" writes: > Even conceding Friedman's points, we can still make a strong case >that *chronically large* deficits do harm to the economy beyond the >additional government spending that they finance. That is, at some >extreme of budgetary imbalance, the method of finance does matter. >The key difference is reflected in the difference between the tax >code and the (nonexistent) "deficit code." Granted, the tax code is >outrageously complex and changes all too often, but there is no >deficit code at all. ... > In an era of deficit finance, investors/entrepreneurs/speculators >have to make guesses about how the government's borrowing strategy, >and if they guess wrong, they lose big. It seems as if your objection to deficit financing would go away if we did have more of a deficit code, or if there were cheap enough ways to hedge against that uncertainty. Anyway, the fact that there are costs to deficit financing doesn't show that these costs are larger than the costs associated with the alternative possible forms of financing. It is of course plausible that the dependence of harm on choice is concave, and so some intermediate mix is best, but this isn't an especially strong argument. Robin Hanson hanson@hss.caltech.edu http://www.hss.caltech.edu/~hanson/ ====================================================================== >From: "Roger W. Garrison EC" >To: libprofs >Date: Wed, 13 Mar 1996 14:31:13 CST >Subject: Re: Federal Debt >Cc: hanson@hss.caltech.edu, "Roger W. Garrison EC" Re: > It seems as if your objection to deficit financing would go away if we > did have more of a deficit code, or if there were cheap enough ways to > hedge against that uncertainty. Anyway, the fact that there are costs > to deficit financing doesn't show that these costs are larger than the > costs associated with the alternative possible forms of financing. It > is of course plausible that the dependence of harm on choice is > concave, and so some intermediate mix is best, but this isn't an > especially strong argument. > > Robin Hanson hanson@hss.caltech.edu http://www.hss.caltech.edu/~hanson/ Robin: I like your response. It acknowledges the essence of my argument and points the way to further analysis. I used the term "deficit code" to maintain the parallel with "tax code." But I can't quite imagine just what an actual deficit code would look like. The Treasury can't say just how it is going to finance the deficit because it can't say just who will buy its Treasury bills (domestic savers? foreign banks?). You say my argument isn't an especially strong one. I think it's just strong enough. I wouldn't want to argue that government borrowing is worse than *any* tax. I strongly suspect, for instance, that a value-added tax would be worse for the economy than an equivalent amount of debt. And I want to give Milton Friedman his due. If the government were borrowing $300 million per year instead of $300 billion (and had a proportionally smaller amount of outstanding debt), then the Treasury would be just one more borrower in line at the credit window; there would be no basis for worring about the uncertainty and discoordiantion that my argument about a *chronically large* deficit entails. My argument does point to a perversity in the relationship between the Federal Reserve and the Treasury that may cause us to worry a little more about the deficit. In its standby capacity as a debt monetizer, the Fed keeps Treasury bills free of default risk. The Fed, if effect, externalizes the risk, which shows up, as I argued, as uncertain market conditions. So, here's the perversity: People buy Treasury bills (rather than private-sector securities) to avoid the risks caused by the Treasury's issuing so many Treasury bills. Alternatively stated, the more the Treasury borrows, the easier it is for it to find willing lenders. With its potential for debt monetization, the Fed provides the Treasury with an awfully long (and expanding) leash. I think we have plenty of justification for worrying about this. Roger Garrison ====================================================================== >Date: Wed, 13 Mar 1996 15:51:33 -0500 >From: jnarveso@watarts.UWaterloo.ca (Jan Narveson) >Subject: Re: Federal Debt okay (fwd) Seeing some of the other posts on the national debt reminds me to make another point, rather more important than the one immediately at issue. Individuals create debt, by borrowing. The fact that their government has created a great deal of debt, which entails enormous expense on individuals who have to participate in paying it back with their taxes, means that these people are not able to do things they otherwise would have been able to do with their money. Federal borrowing is justifiable only if taxes are, in other words. The view that the Feds can go ahead and spend money they have "created", no problem, is quite false. The initial argument reminds me of people who criticize some government program and say, "The money could have been spent on x or y or z" - where x, y, and z are *other* government programs. What they should say is, "the money could have been spent by the people whose money it is, for things that those people want!" __________________________________________________________________________ Jan Narveson (Professor) Department of Philosophy, University of Waterloo; Waterloo, Ontario, Canada, N2L 3G1 (519) 888-4567-1-2780# (from touch-tone); or 885-1211, ext. 2780 (via switchboard); FAX (519) 746-3097 Home: (519) 886-1673 (answering machine) e-mail: jnarveso@watarts.UWaterloo.ca ====================================================================== From: kurt@wickman.pp.se Date: Thu, 14 Mar 1996 18:29:22 +0100 Subject: Re: Federal Debt okay (fwd) Jan Narveson's point seems to me to be the deciding one in the discussion of the public debt. Any public consumption project is in reality a tax, easily analyzed with the help of the "Ricardo equivalence" theorem. Ricardo pointed out that, if "a prince" decides to go to war, which is to prefer: to finance the war by borrowing or by a war tax. He showed that it is no difference - if the prince takes a loan, it is only a postponement of the tax. And the philosophical dilemma among macro-economists is that they seldom recognize that any government at best can use the funds equally efficient as the individuals that the funds are taken from. But normally the government is not in a position to concentrate enough information to use it that way. There is always some missing information that causes inefficiency. Maybe it would be a good idea to see to it that the government sticks to its basics, and that we stop teaching macro-economics - sometimes it seems to me that it has very little of importance to offer - apart from some half-advanced mathematics, not extremely well tuned to the economic problems under discussion. And public borrowing is a problem, belive me, I am a Swede that can experience what it means to have a public debt at 90 per cent of GNP! All the best Kurt Wickman ====================================================================== Date: Thu, 14 Mar 96 15:30:01 EST From: (George Selgin) Subject: Re: Federal Debt not "okay" In Message Thu, 14 Mar 1996 18:29:22 +0100, kurt@wickman.pp.se writes: >Jan Narveson's point seems to me to be the deciding one in the discussion of >the public debt. Any public consumption project is in reality a tax, easily >analyzed with the help of the "Ricardo equivalence" theorem. Ricardo pointed >out that, if "a prince" decides to go to war, which is to prefer: to finance >the war by borrowing or by a war tax. He showed that it is no difference - Although Kurt's claim is frequently encountered, the truth is that Ricardo himself did *not* believe in the "equivalence" proposition named after him. Ricardo did indeed explore the question of debt vs. taxes, and he did come up with conditions in which the equivalence proposition would hold. But then he immediately (unlike modern macroeconomists) went on to observe that the conditions (including the requirement that the encumbrances represented by public debt be fully transferable) were unrealistic, so that the proposition is in fact false. (For example, an older, mortal taxpayer without heirs has good reason for preferring debt to taxes!) Thus whether a prince goes to war or not may very well depend on whether he can borrow instead of taxing. On Ricardo's views on the "Ricardian" equivalence theorem, see Gerald O'Driscoll, "The Ricardian Non-Equivalence Theorem", History of Political Economy, circa. 1976-7; and James Buchanan, "Barro on the Ricardian Equivalence Theorem" JPE 1976. George Selgin ====================================================================== Date: Thu, 14 Mar 96 15:50:23 EST From: (George Selgin) Subject: Correction In my last post to the list, I supplied the wrong location for O'Driscoll's article on the "Ricardian" equivalence theorem. The article appeared in the JPE, February 1977. George Selgin ====================================================================== Date: Thu, 14 Mar 96 16:44:18 EST From: (George Selgin) In Message Thu, 14 Mar 1996 16:10:32 -0500, jnarveso@watarts.uwaterloo.ca (Jan Narveson) writes: > >A quick pointer About George Selgin's quick pointer: note that what he says >does not disprove the claim that government borrowing is equivalent to >taxing. My point was simply that *Ricardo* didn't claim or believe they were "equivalent", in the sense suggesting that the option of public borrowing has no special value to the state, or no influence on its budgeting and spending decisions; certainly he rejected the methodologically-collectivist "we owe it to ourselves" way of thinking of the problem. Ricardo's whole point is that it is misleading to consider two means for raising revenue "equivalent" in the burden they pose to society when "society" is likely to refer to one group of persons in the first instance and to another group in the second! As for Ricardo's way of thinking being "Keynesian", well, that would certainly come to a surprise to Buchanan, an anti-Keynesian if there ever was one, also not inclined to "flummarize", who rather agrees with Ricardo and who associates the equivalence view itself with Keynesian modes of analysis (notwithstanding Barro's having unknowingly "rediscovered" the equivalence theorem--now *there's* one of those "clever macroeconomists" for you). See Buchanan and Wagner, Democracy in Deficit, pp. 134ff. The phrase "we owe it to ourselves" is itself, of course, Keynesian to the core. George Selgin ====================================================================== Date: Thu, 14 Mar 1996 17:39:44 -0500 From: Reuven Brenner To: RGARRISN@cob-1.business.auburn.edu, libprofs Subject: Federal Debt -Reply Neither debts, nor deficits are the issue. The issue is whether or not the tax paying citizens expect to earn back , directly or indirectly, over a certain horizon more than their cost. So the question is are there political institutions in place to prevent persistence in error. After all, think about the "deficits" and accumulating debts of companies like McCaw Cellular, Medco, Turner, Viacom, Circus Circus. The five had a combined equity market value of $15 billion in 1989, although taken together they had no reproted net income. Not only was 15b their market valuation, but it was continuously rising. Why their "debts" and "deficits" aren't a problem? Because the stock markets are there to prevent persistence in error of their respective managements. If you want to know more on this, see Chapter 3 in my Labyrinths of Prosperity, 1994. Reuven Brenner ====================================================================== Date: Thu, 14 Mar 1996 18:04:04 -0500 (EST) From: Bill Woolsey Subject: National Debt When most laymen think of economic disaster, they probably think of something like the Great Depression. Large numbers of firms close, production and output fall greatly more or less across the board. Huge numbers of layoffs occur with few new hires, so that the unemployment rate rises greatly. Persistent deficits and a growing national debt are unlikely to cause _that_ sort of economic disaster. The semanticist has a point. On the other hand, the "hyperinflation" scenario is a quite different kind of disaster and our semanticist pointed to that one without mentioning it. He correctly pointed out that the government cannot go bankrupt because it can pay off its debts with money that it creates. (Well, assuming our current fiat money system.) He then went on to say that the creation of money leads to prosperity. Probably most economists would agree--in the short run. That is, any prosperity generated by money creation would be short lived. And if one is thinking of the creation of large amounts of money to repay large debts, then to suggest that prosperity is the prime consequence is almost laughable. The primary consequences would be a huge increase in the price level and very high rates of inflation during the adjustment period. So to the degree that our "semanticist" was trying to prove that a Great Depression is not the likely consequence of excessive debt, there is something to his argument. Instead, the disaster would be one of those in which people must carry money about in wheelbarrows. That sort of thing might well be disruptive to real economic activity and maybe the result would be some kind of recession, but it wouldn't quite be like the Great Depression. This is, of course, the worst case scenario. By the way, the "Virginia School" position is that the problem with deficit finance and the national debt is that future taxpayers must bear an interest expense. If those deficits and that national debt had not been imposed, the persons who would have received interest on government bonds could have still received a return on various private securities. So those who receive the interest on government bonds do not receive a benefit that matches the cost imposed on future taxpayers. (If the deficits and debt were to finance government investment that generated a return greater than the interest, then these considerations do not apply.) When future taxpayers become tired of this interest burden and assuming they can outvote the bondholders, the the inflationary default (perhaps hyperinflationary default) would occur. Since current voters can obtain current "consumption" benefits from government programs while imposing the cost on future taxpayers, they are likely to vote for more such programs than if they had to pay for them with taxes today. One of the key characteristics of a "good" tax system according to the Virginia school is for voters to clearly see the tax cost of the government programs that they might find beneficial. Like Ricardo, the Virginia School is unimpressed by claims that each voter calculates that deficits will raise their future taxes and all adjust their bequests accordingly. It is important to distinguish between market processes that allow relatively ignorant individuals to coordinate their activities and supposed political choices that assume tremendous cleverness. My father-in-law operates a business and has only the loosest knowledge of how the signals and incentives created by prices lead him to coordinate his activities with those of just about everyone else. But that doesn't matter. He doesn't need to know. But according to the Ricardo equivalence theorum, he either is indifferent to the well-being of his grandchildren, or else he is adjusting his saving according to changes in the national debt. Well, I asked him. He was actually a little defensive about it, but it was pretty clear that this whole issue had never crossed his mind. I would suggest asking a few other people before building models that assumed that everyone must be aware of the equivalence between debt and taxes. Of course, clever mathematical models that can formally prove equivalence given rational self- interest will allow an economist to be successful, even if no one takes the result seriously. (Our semanticist never raised the issue. Other economists brought it up in the subsequent discussion.) Bill Woolsey Email: Bill.Woolsey@Citadel.edu Dept. of Business Administration Home: (803) 795-5062 The Citadel Office: (803) 953-5161 Charleston, South Carolina 29409 Fax: (803) 953-7084 U.S.A. ====================================================================== Date: Thu, 14 Mar 1996 20:17:17 -0500 (EST) From: Bill Woolsey I found the original article. It read in part: >The United States, on the other hand, has some advantages that individual >Americans do not have. The Federal government can "borrow" from the Federal >Reserve System. Although this procedure is usually labelled "borrowing," in >reality the Federal government creates money and expands the money supply >through this type of financing. Individuals, states and businesses do not >enjoy this luxury. > >When the Federal government expands the money supply through deficit >financing, more funds can be made available for increasing production of >goods and services, and for the public to purchase those goods and services. Here is the peculiar notion that an expanding money supply solely increases production. No notion that it might lead to some inflation. The writer later claimed: >has paid off his debts. However, since much of the Federal debt is held by >no one in particular ... just the Federal Open Market Committee of the >Federal Reserve Board, any serious attempt to "pay off the Federal debt" >would have to mean much higher taxes and shrinkage of the money supply. Both >would leave us worse off economically. Well, taxes would be higher than necessary to finance whatever level of government spending existed during the effort to repay the national debt, but after that sacrifice was made, taxes would be lower since it would no longer be necessary to pay interest on the national debt. The claim about the money supply is rather puzzling. I suppose the assumption is that nothing but government debt could possibly serve as security for currency. Bill Woolsey Email: Bill.Woolsey@Citadel.edu Dept. of Business Administration Home: (803) 795-5062 The Citadel Office: (803) 953-5161 Charleston, South Carolina 29409 Fax: (803) 953-7084 U.S.A. ====================================================================== From: kurt@wickman.pp.se Date: Fri, 15 Mar 1996 09:35:56 +0100 George, I am not in agreement. You are not discussing whether public debt will be transformed to a tax or not - but the distribution of that tax burden. Of course, one of the pillars of public choice tax theory is that different interest groups apply techniques of re-distributing that tax burden from the beneficiaries to the general tax paying collective. I don't think that Ricardo (or Buchanan, for that part) would deny that a debt-financed extra subsidy to the unemployed will be transformed to a tax later on. Even if people have different timing perspectives - which they do - any reasonably dynamic analysis can not escape the tax conclusion. All the best Kurt Wickman ====================================================================== From: kurt@wickman.pp.se Date: Fri, 15 Mar 1996 09:48:51 +0100 Bill, Give the conclusion whether people apply the Ricardo equivalence theorem or not one more chance. It is obvious in Europe that people do (and in the US, too, I think). The large deficits in Europe will mean higher taxes and lower payments for social security in the future - even the near future. What is the rational reaction, if you realize this? To raise your personal savings rate. This is also what is happening everywhere in the Western world - you compensate for the expected higher tax burden in the future. Keynesian economists are not aware of this very important adjustment process. They are merely noticing that people save - and recommend governments to confiscate this saving "to get the domestic consumption industry going again". All the best Kurt Wickman ====================================================================== Date: Fri, 15 Mar 1996 09:24:53 -0500 From: jnarveso@watarts.UWaterloo.ca (Jan Narveson) [Profs: Oops, I forgot to cc this to the group, having responded to Kurt's message with the "return" key. Sorry. - J.N.] I will add to Kurt Wickman's observation here that the process he has in mind is already well under way in Canada, which has a fabulously high public debt. (It totals out at about $105,000 *per capita* already). Interest payments on this debt are now forcing reductions at all levels of government; e.g. in Ontario, welfare payments are down 20% already, Universities a similar amount; at the federal level, restrictions on pensions and all other government programs are under way with more to come. The idea that maybe borrowing is fundamentally *different* from taxing is what is wrong; that it is in detail different is obvious. The point about debt schedules is the king-pin. As Kurt says, it's how you distribute the taxes that is different, but the fact of their being taxes is unassailable. It is, however, easier to hide the taxes that debt imposes - for awhile, especially. >Bill, >Give the conclusion whether people apply the Ricardo equivalence theorem >or not >one more chance. It is obvious in Europe that people do (and in the US, too, I >think). The large deficits in Europe will mean higher taxes and lower payments >for social security in the future - even the near future. What is the rational >reaction, if you realize this? To raise your personal savings rate. This is >also what is happening everywhere in the Western world - you compensate >for the >expected higher tax burden in the future. >Keynesian economists are not aware of this very important adjustment process. >They are merely noticing that people save - and recommend governments to >confiscate this saving "to get the domestic consumption industry going again". >All the best >Kurt Wickman ====================================================================== Date: Fri, 15 Mar 1996 08:43:00 -0600 (CST) From: Tibor R Machan One thing I always thought was off about public debts is that they conflict with the idea: "No taxation without representation." On the other hand, since I believe all taxation is immoral, the point is moot. Should a government operate by means of voluntary payment - for this, see my essay on the subject in THE LIBERTARIAN READER (Rowman & Littlefield, 1982) proposing the contract-fee idea, borrowed from Rand - I think its budgetary policies would follow thos of any enterprise - it could borrow provided its credit is good. Is this naive? Tibor Machan ====================================================================== Date: Fri, 15 Mar 96 10:55:23 EST From: (George Selgin) In Message Fri, 15 Mar 1996 09:35:56 +0100, kurt@wickman.pp.se writes: I don't think that Ricardo > >(or Buchanan, for that part) would deny that a debt-financed extra subsidy to > >the unemployed will be transformed to a tax later on. True. But the fact that a tax must eventually be imposed, and that citizens recognize this, is not itself sufficient to support the standard "equivalence" proposition. One also has to rely on a representative agent framework, and perfect knowledge or something like it. Otherwise current taxpayers cannot be assumed to value future tax liabilities "at the extreme Ricardian limits" (Buchanan and Wagner, p. 139). Anyway, Buchanan quite unequivocally and emphatically rejects the proposition; and so (according to both Buchanan and O'Driscoll) did Ricardo. George ====================================================================== Date: Fri, 15 Mar 96 11:03:03 EST From: (George Selgin) Perhaps I'm mistaken, but I seem to detect a current underlying recent posts on Ricardian "equivalence" suggesting that those who reject it are inclined to the normative view debt finance is "better" for society than immediate taxation. For the record, nothing could be further from the truth. George Selgin ====================================================================== From: "Roger W. Garrison EC" Date: Fri, 15 Mar 1996 11:19:34 CST Subject: Federal Debt Tibor: You envision a government whose "budgetary policies follow those of any enterprise--it could borrow, provided its credit is good." And then you ask: "Is this naive?" It may be naive to think that the government could ever be so constrained, especially in terms of its power to tax and its power to create money, that "good credit" would have the same meaning for the government that it has for private enterprise. I realize, though, that your "contract-fee idea" presupposes *no* governmental powers of taxing and printing money. If we can reduce the government to that point, we probably won't have to worry too much about government debt. In the meantime, we do have to worry precisely because of the perverse link, in the case of government, between "fiscal responsibility" and "ease of borrowing." For a private firm, the failure to behave in a fiscally responsible way means that the firm can no longer borrow at normal rates of interest; it must pay a default-risk premium. Even municipalities, which have the power to tax but not the power to print money, can borrow so excessively that their bonds are downgraded, as New York City discovered in the mid 1970s. By contrast, the interest rate the Federal Treasury pays never involves a default-risk premium. Quite to the contrary, the uncertainties in the private sector attributable to government debt make Treasury bills *more* attractive to the individual investor. It is as if the Treasury faces a *negative* default-risk premium. This is the preversity I noted in an earlier posting. And, of course, as George Selgin's postings imply, the Ricardian Equivalence Theorem gives us no protection from this perversity. Roger Garrison ====================================================================== Date: Fri, 15 Mar 1996 12:50:24 -0500 From: jnarveso@watarts.UWaterloo.ca (Jan Narveson) George Selgin says: "True. But the fact that a tax must eventually be imposed, and that citizens recognize this, is not itself sufficient to support the standard "equivalence" proposition. One also has to rely on a representative agent framework, and perfect knowledge or something like it. Otherwise current taxpayers cannot be assumed to value future tax liabilities "at the extreme Ricardian limits" (Buchanan and Wagner, p. 139). Anyway, Buchanan quite unequivocally and emphatically rejects the proposition; and so (according to both Buchanan and O'Driscoll) did Ricardo." Well, whatever Ricardo and Buchanan said,let's remember that the debt is NOT all "future" ; the interest payments start NOW, not in the future. It's only the principal that may wait til the future (or forever?). It's financing the debt that is imposing current burdens in contemporary countries (like Canada, where I am personally supplying about $10,000/annum for this purpose. Don't tell me that this doesn't look like a "tax"....!) ====================================================================== Date: Fri, 15 Mar 96 14:07:30 EST From: (George Selgin) In Message Fri, 15 Mar 1996 12:50:24 -0500, jnarveso@watarts.UWaterloo.ca (Jan Narveson) writes: >Well, whatever Ricardo and Buchanan said,let's remember that the debt is >NOT all "future" ; the interest payments start NOW, not in the future. It's >only the principal that may wait til the future (or forever?). It's >financing the debt that is imposing current burdens in contemporary >countries (like Canada, where I am personally supplying about $10,000/annum >for this purpose. Don't tell me that this doesn't look like a "tax"....!) But Jan, most of the interest obligations you are now financing were contracted for (if that phrase can be used to describe the outcome of a democratic process) in the past. Buchanan's point is best understood by thinking of "us" as being the "future" taxpayers bearing a burden that past generations saddled us with, thanks to their own (rational) preference for debt over taxes. (We are presently in the process of putting the screws to future generations of taxpayers, and so on.) The taxes you are paying didn't "look like a tax" to persons, and older persons especially, living when the bonds being serviced were first issued. And that's precisely the problem. The non-equivalence of debt and taxes to any one generation of taxpayers gives us reason for expecting debt finance to be abused, as members of each generation attempts to foist some part of the government- spending burden on future persons. Ironically, the misuse of the equivalence theorem in arguing that it doesn't matter whether government spending is financed one way or another has actually helped to get all of us into the present debt mess. If governments could only tax, they would spend less. That's the bottom-line of "non-equivalence." George Selgin ====================================================================== From: kurt@wickman.pp.se Date: Sat, 16 Mar 1996 01:01:45 +0100 George, I am not sure that I understand you right - but Jan Narveson is right when he states that any public consumption that is debt-financed is payed thru taxes immediately. I am not sure that you have finished your thought process just yet, when you say that a big part of the taxes that we pay now is for debt-financed consumption of our parents. It is not a fact - no Western society does that: the main public consumption that we pay for during the 1990s happened during the 1980s. The tax policies in practically all Western societies fell apart during the 1980s, but not the public expenditure schemes. The result of this fundamental crisis in basic economic policy was a fast growth of public debt. The ideal of inter-generational public finance is that the government - this is theory, in practice I am very critical of most public finance projects, just to clarify - can borrow to invest, this will not shift any burden on future generations. And consumption should be payed thru taxes by the generation that consumes the service. So far, so good - no inter-generational shifting of the tax burden. But still, it is always a debt transformed to a tax. Governments main source of income in modern society is tax (historically, it was customs duties, but we can leave that aside). I am puzzled by your interpretation of the theoretical consequences of the equivalence theorem - I seldom find myself in disagreement with Buchanan. Is this a first? I will think over what you are saying about their position, and return. Anyway, all the best Kurt ====================================================================== From: shapiro@bgnet.bgsu.edu Date: Mon, 18 Mar 1996 10:32:40 -0500 (EST) Subject: Joke Some of you on these lists may have already heard the joke below, as it making its way through the country, but in case you haven't heard it, here goes: They have solved the deficit problem in Washington. They plan to issue three kinds of bonds to pay for the deficit: Gingrich bonds--no maturity. Dole bonds---no interest. Clinton bonds--no principal. Danny Shapiro ====================================================================== Date: Mon, 18 Mar 96 10:43:19 EST From: (George Selgin) In reply to Kurt's last post: I made no quantitative claims. I merely said that some of today's outstanding debt was "contracted for" in the past, or by earlier "generations" of taxpayers. In real terms, of course, whatever reasources the government consumes today are resources it gets its hands on today. But the question of equivalence boils down to whether, faced with the prospect of the government using X resources today, today's taxpayers would be indifferent to paying nominal taxes vs. letting the government borrow against future taxes to finance the use of these resources. In the debt-finance case, lenders finance the expenditure initially (in return for competitive interest payments), taxpayers eventually. Why might one prefer to lend to the government instead of paying it taxes immediately? Because one might evade future (larger real) tax obligations by dying at a convenient time, letting others bear the increased future tax burden instead. So a current increase in debt might seem the better deal to some; at the same time, we all may regret the decision to rely on debt finance made by our predecessors, some of whom are no longer around to share the burden. (People would rather not die, of course. But if you're on your death- bed, you have no more reason to regret your past investments in Treasury securities than you would to regret your holdings of other bonds or stocks; you might even have a chance to sell-out and go on a binge. On the other hand, you might regret the wealth you allowed yourself to hand-over to the government in taxes when you could have offered to lend to it instead.) That current taxpayers may have a "debt bias" (that is, they hate the debt that's come due, but prefer adding to the total stock of debt to adding to current taxes), is not an argument in favor of debt finance. On the contrary, it is an argument as to why debt tends to be overused in a democratic society, because it involves an element of taxation without representation: people voting to tax, not themselves, but future voters. How important the problem is in fact is a quantitative issue that I did not mean to take any position on. (I also admit that one could come up with models where persons who had heirs cared *more* about the heirs than about themselves, therefore offsetting the opposite (presumed) bias of persons having no concern for future generations.) If the world were populated by infinitely-lived representative agents or if government spending where on productive investment rather than consumption, things would be different. But people are mortal, and government spending is, mainly, consumption. George George ====================================================================== Date: Mon, 18 Mar 1996 12:23:28 -0500 (EST) From: Bill Woolsey George Selgin wrote: >That current taxpayers may have a "debt bias" (that is, they hate the >debt that's come due, but prefer adding to the total stock of debt to >adding to current taxes), is not an argument in favor of debt finance. On >the contrary, it is an argument as to why debt tends to be overused in a >democratic society, because it involves an element of taxation without >representation: people voting to tax, not themselves, but future voters. >How important the problem is in fact is a quantitative issue that I did >not mean to take any position on. (I also admit that one could come up >with models where persons who had heirs cared *more* about the heirs than >about themselves, therefore offsetting the opposite (presumed) bias of >persons having no concern for future generations.) >If the world were populated by infinitely-lived representative >agents or if government spending where on productive investment rather than >consumption, things would be different. But people are mortal, >and government spending is, mainly, consumption. I agree with Selgin, however, I think there is a little more to be said about the "rationality" assumptions in the argument. Current voters see current taxes. They are difficult to ignore, directly relating to our budget restraint. The implications of debt for future taxes is quite easy to ignore. Similarly, the implications of current consumption for future consumption (say, after retirement) is quite easy to ignore. _If_ individuals lived for a very long time and they had lived through several debt buildups and payoffs, then I would agree that nearly everyone could be expected to learn that debt implied future taxes of equal present value. Even if everyone had been through it once, I would expect a good deal of learning. But that is not the real world. In "neo-classical" economics, these sorts of considerations are rejected out of hand as being unscientific. They (or we) do our work on the assumption of rational expectations. George made some reasonably obvious points about why perfect equivalence would not hold in even that situation. Roger Garrison wrote a paper that made some quite subtle and interesting points about why equivalence would not hold even given rational expectations. Hey, that is the kind of paper that will be published in journals where all of the reviewers insist on rational expectations as a necessary assumption of scientific work. My view (which I don't think is all that uncommon) might be granted, but it just isn't scientific. It wouldn't count as economics because I wouldn't be working out the implications of some kind of maximization problem subject to a constraint. I agree with Kurt that a crisis atmosphere regarding a very large national debt (say 90% of GDP) might well cause increases in saving. This could be because people expect larger taxes. Or it might because of some confused notion that some Great Depression-type disaster is likely. The equivalence theory, however, is that every change in the budget deficit is exactly offset by a change in private saving so that national saving remains unchanged (from what it would have been.) People increase saving to be prepared to pay the additional future taxes implied by the additional debt. By the way, Jan N. said that in Ontario, high interest burdens were resulting in large cuts in current government expenditure. If I had considered that a possibility when the debt was first issued, why should I treat that as being equivalent to current taxes? I believe the equivalence theory takes government spending as given. ====================================================================== From: kurt@wickman.pp.se Date: Mon, 18 Mar 1996 20:44:01 +0100 George, Your points are very interesting, but I think they lead into another discussion that might be more interesting. If you take the "equivalence theorem" to mean that tax and government debt should be identical for every household, there is no identity, of course. There probably is a "debt bias" in a democratic society - which only means that people prefer to postpone taxes (time preference schemes are short-term, which is one of your points, and I agree), not that they expect the debts should go away without raising the future tax-burden. It is hard for me to imagine, though, that there should be some kind of rational ignorance that guides people's adjustments to government finance. I might be wrong, but I interpret the change in savings patterns in Europe this way: people expect social insurance to break down and that taxes will go up; they also expect interest rates to go up, meaning a proportionally higher tax rate (resulting from a high government debt) - so, they over-compensate by very high savings rates. One interpretation of this is that they act according to the equivalence theorem: even when they show short-term time preferences ("debt bias"), they expect debts to turn up as a tax that they will pay later on. One interesting discussion, though - where I have only vague, not very convincing ideas - is why there is a "debt bias". All the best Kurt Wickman ====================================================================== Date: Mon, 18 Mar 96 16:07:26 EST From: (George Selgin) In Message Mon, 18 Mar 1996 20:44:01 +0100, kurt@wickman.pp.se writes: >There probably is a "debt bias" in a democratic society >- which only means that people prefer to postpone taxes (time preference >schemes are short-term, which is one of your points, and I agree), not that >>they expect the debts should go away without raising the future tax- burden. That's right. My argument is consistent with everyone knowing that someone must bear the burden of any spending someday, and also with their understanding that the aggregate (present value) real burden doesn't depend on the method of finance. But what matters to people's choices is not the aggregate burden or aggregate expected burden but the burden they themselves expect to have to bear. > One interpretation of [high savings rates] is that [people] act >according to >the equivalence theorem: even when they show short-term time >preferences ("debt > >bias"), they expect debts to turn up as a tax that they will pay later on. One >interesting discussion, though - where I have only vague, not very >convincing ideas - is why there is a "debt bias". The "bias" I have emphasized can only be understood by getting away from the language of "they" and by thinking of individuals. In the above sentence, "John Doe" does not necessarily expect debts contracted between him and his government today to "turn up as a tax" that he, John Doe, will have to pay later on. Instead, John Doe assigns some probability, X, to his having to bear a share of future taxes, and another probabililty X-1 of dropping dead while the necessary taxes are still being gathered (and after he has unloaded his bonds and gone on a Pinacolada binge in the tropics), so that Joe Shmoe and Joe Shmoe Jr. have to bear the ultimate burden after all. George (P.S. to Tibor: Did your eyes unglaze when they came to the word Pinacolada, or have I underestimated your interest in the technicalities of public finance?) ====================================================================== Date: Mon, 18 Mar 96 16:54:10 EST From: (George Selgin) Subject: debt again (sorry) I thought that Kurt and Jan especially would find the following of interest. It is from Richard Musgrave's "Brief History of Fiscal Doctrine" in the North-Holland Handbook of Public Economics, which a colleague recently brought to my attention. According to Musgrave, after cleverly illustrating a scenario of debt-tax equivalence, Ricardo "hastens to reject it as unrealistic" ultimately concluding that loan finance, unlike tax finance, "differ in their effect on capital formation and hence on the position of future generations." Loan finance tends to reduce saving and capital formation [since the current generation does not act as if it anticipated having to bear the full burden of future taxes], the consequence being that "the future generation *is* burdened by having a lower income"... . "Ricardo's rejection of the equivalence theorem could not be more explicit, and it is strange that the equivalence theorem could now be presented under his banner." George Selgin