On to debt – karl’s points, again, are on target in general. But in terms of effect on our ability to maintain or improve our standard of living, no and in the future, there are some real affects of debt. Karl states, ”

However, at the macro-scale resources have to be transferred out of the economy at the time they are used. There is no way to teleport resources from the future to now. Therefore, the argument that we are borrowing against our future is largely an accounting fiction. Resources that are used to today must be produced today and must detract from consumption or investment that occurs today.

We are not teleporting resources from the future to today. However, we are committing our future resources to debt service. That debt service the cost, yes, spent in those future years, of our ability to advance purchase things today. In a way, we are not limiting our future consumption in the aggregate, we just PROMISE that we will ‘consume’ or spend in a particular way, that is, in interest payments. While this re-circulates funds back to private investors (or other countries), it hamstrings the ability of government to spend on anything else. So it does limit what the government can do. We will only have so much to spend. If the proportion of what we spend in interest payments increases, and it is mandatory (I hope no one is suggesting we default on our debt) the proportion available for other government priorities decreases. If by inaction we gradually allow entitlements to grow as a proportion of the budget as well, our discretionary public policy choices are slowly being more and more limited.

Now, if we wish to increase taxes, cut other spending, or are able to have our economy grow at such a pace that we have a sustained (permanent?) windfall in revenues, this is not a problem. the whole pie grows and we are able to maintain sufficient funds for other items and debt payments and entitlements. In fact, I have no problem with increasing debt, but I wish to do it with an understanding of this consequences.

I am not sure, Karl, what your point is in the following statements – I may just not be familiar with this argument, so please post more on it, and how it relates to why the level of government debt is inconsequential. I want to be clear – having some debt is healthy, and I don’t know of any economist or public policy analyst or anyone else really that is arguing for having no debt. Borrowing for long-term investments and productivity improvement is sensible. And large amounts of debt (as a percent of GDP) are acceptable in the short-run if if can lift us out of a recession or depression or help in an emergency such as a way. In this century, this has happened three times, and each time the country was shortly able to reduce debt as a percent of GDP back to relatively low levels within a decade or so. The worry in the current situation is that there are structural impediments to being able to get to surplus or high growth that would return us to lower levels of debt to GDP. Those structural impediments include the entitlements, a change in world market power of the us versus other countries, an aging population and lower birth rates, a stagnant economy, relatively high unemployment, a low national savings rate, etc. etc.

You might be worried that its investment that is taking the beating. However, that doesn’t seem to be the case. The relationship between investment spending and government borrowing is weak. This is because the relationship between government borrowing and gross domestic savings is weak. The share a cyclical component but their secular trends are unrelated.

That is, when the economy is bad gross savings falls and government savings falls. Government savings is the inverse of government borrowing. However, over the longer term gross savings is rising while government savings is falling.

One point related to this is that some have argued in the past that government spending is less efficient than the private sector, and therefore if government sucks up investors dollars, those dollars are not put to as good a use as they would be in private hands. I tend to disagree, especially in light of the very, very wise use of private investment money in the past years, brought to light in the financial crisis driven by private banks. It seems ironic that government has had to bail them out (while borrowing heavily to do it!). I am SOOOO glad that we are continuing to support private investment firms so that they can promote and guide private investment wisely again. (this is meant to be very sarcastic, of course)

A related issue, of course, is that some might argue that the U.S. does not have to worry about levels of overall debt to GDP because we hold the international standard of investment security. Everyone thinks us treasury notes are the safest form of investment, correct? What if we do not maintain this position? Note the reduction in Chinese purchases of debt mentioned above. Also see, “GLOBAL MARKETS-US stocks, euro, Treasuries fall on debt worries” athttp://www.reuters.com/article/idUSN2417952320100324?type=usDollarRpt, the reuters news service, noting that in the most recent sale of treasuries, there was a poor showing.

Now I am not a financial expert, and all the interactions of dollars, debts, currencies, and interest rates, can make my head swim, mainly because much of it is based on competing predictions of human behavior in the future. I will defer to others there! My concern is on the more short-term (read 5-10-15-20 years) of impact on public policy, from local schools to national environmental protection. If we can’t sell our debt, we may have to raise related interest rates to make it more attractive. That means yet higher permanent obligations on our future budgets. Same problem as above.

Let me consider Karl’s point:

The important upshot is that little of this effects the US directly. We have dollar denominated debt. That is, we have borrowed money from the rest of the world in dollars and promised to repay that money in dollars. If the value of the dollar crashes then that’s just too bad for them. That get paid back in a currency that is worth less than what they lent in.

I agree, countries heavily invested in the U.S. right now would not want to see the value of their holdings decline. But what if they, like China for the past three months, start buying less dollars? What if they decide to diversify so the risk posed by a declining dollar doesn’t matter as much? Then the hold of the dollar is lessened. Over time, we would be held to the same national debt/deficit standard that is imposed on many, many other countries that compete with the dollar right now. And right now, there is no way we could meet that standard, or get even close, in the next few decades (again, baring massive changes in taxes, government spending, or high growth in the economy.)

Going forward, the possibility of folks not wanting to lend us money, or borrow from us, eats away at the argument defending the fact that much of our debt is held oversees. Karl says that in the past, we get more interest than we pay out. What if that situation is reversed? Is it reasonable that we will be “big and safe” going forward? Or more reasonably, “bigger and safer” than alternatives? Karl’s point is rational, but markets and perceptions and worry and investor decisions are decidedly not rational.

Finally, I agree with Karl, in the end, something will happen, and taxes will be raised. We will also re-think the role of government in our society. I happen to like government’s role – I think good government improves societal well-being. I’d just rather on have to eliminate science classes in schools, eliminate jobs programs, housing programs, clean water programs, public safety programs, health research, small business programs, road building, or default on pension obligations, or log out forests to get some quick cash, or cut oversight, etc. in the meantime. Some changes now will lessen the pain of what we have to go through.

So politicians, go ahead and tax me. Make my day, er, my children’s future!

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