Yesterday I said I had no problem with a $300 billion or $400 billion deficit in a bad year, “or even – given the size of our economy – with, say, a $100 billion deficit every year. (That would be less than 2% annual growth in our national debt. If the economy were growing at a nominal 4% a year – between real growth and inflation – and our collective debt were growing at just 2%, our indebtedness would steadily shrink in proportion to our economy.)”
Michael Young: “I don’t think you really mean that, do you? The arguments against a $400B deficit still apply at the $100 billion level. It’s only a matter of *how soon* it catches up with us.”
Not true. Imagine a $200,000 house you buy with a $160,000 mortgage – 80% of the purchase price. Now imagine adding 2% a year to the outstanding principal (instead of paying it down) but imagine, also, that its value is increasing at 4% a year. In a century, you’d owe nearly $1.2 million on the house . . . but the house would be worth more than $10 million. So your indebtedness would have shrunk from 80% to 12%.
The problem, I argued yesterday, is when you set yourself on a trajectory, as Bush has done, for $400 billion – and higher – deficits as far as the eye can see. That is, deficits that grow the national debt faster than we can grow the economy, which increases the debt relative to the size of the economy. (That same $200,000 house, worth $10 million after a century of 4% growth, would be burdened by a $13 million mortgage if we added 4.5% a year to the principal balance instead of 2%. The indebtedness would be 130% instead of 12%.)
With $400 billion deficits, I argued yesterday, pretty soon, it mounts up . . . and the interest we have to pay mounts up with it – both because the outstanding balance is higher, but also because that higher balance is likely to be subject to higher interest rates. (When your own credit card debt begins to get out of hand, they stop mailing you those 0% interest offers – just when you need them most.)
If we were doing all this deficit spending to rescue the states from their own fiscal disasters, or to accomplish some fantastic investment to make us more productive in the future, I argued, that would be scary enough. But we are doing it to reduce the tax burden on the wealthy. With the unintended result, I think, that it will make us all less wealthy. What, I asked, could we be thinking?
Quote of the Day
Market economics as currently practiced often ... includes only what's countable, not what counts.~Rocky Mountain Institute
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