Posts Tagged ‘debt’

The Present Debt Crisis

Wednesday, July 27th, 2011

When I was in business, I used to have a cartoon I would post in the office from time to time. It showed an anguished face, literally pulling his hair out, and was captioned “Oh no, you did just what I told you to do”. The point, of course, was the folly of putting together a solution before defining the problem.

In today’s government debt “crisis”, the parties seem to suffer from the same affliction. What problem is this “crisis” supposed to solve? The media says we are trying to avoid default, but that is silly. We should all understand that it would be difficult to default on existing debt unless done so willfully. Government commitments could not be met, but the debt part of it is fairly easy. So what is going on?

Simply put, the problem to be solved is “What portion of GDP should the federal government spend?”. The President seems to want 25%, the House Republicans 18%. Historic tax income has broadly been in the 18 to 19% of GDP range. So how do you spend 25%? Raise more tax revenue. The President’s prescription for this is to tax “wealthy” people at a higher rate, and thus bring an increased percent of GDP into federal coffers. The opposition says that this will not raise more revenues, as people will avoid paying more tax at the cost of economic activity and jobs. Their argument is that if economic activity slows due to rate increases tax revenues will go down, not up. The President says this is not the case, that economic activity will continue regardless of changes in the tax rate.

So draw your own conclusions. But do so in the context of the actual problem being discussed – not all the silliness you see on TV and in the papers these days. What portion of GDP should the federal government spend?

Jim Hirshfield


Saturday, March 20th, 2010

Some bright economist ought to give us a formula with which to analyze how much wealth and income can be taken out of the productive economy and used to deal with non-economic needs in a society. It seems obvious that any country has enough wealth to do a bit of non-economic investing, such as defense, justice systems, and welfare. The issue is to define the “sweet spot”.

While any country can do a bit of investing to satisfy other needs, it also seems logical that for each country there is a point at which such investing takes enough resources away from the productive economy that not only will the productive economy decline, but with this decline the availability of monies to do those unproductive but necessary things will shut down as well. This is what I call the “sweet spot”.

It is a complicated and, for that reason, a fun problem. For one, you could not create this formula with an analysis fixed in time, as governments seem to be good at borrowing against the future. So you would have to consider the cumulative effects over time, and the sweet spot would be defined not only as a per cent of GDP and a per cent of accumulated wealth, but also as a place in time in the future.

A second interesting consideration is how much of the non-economic funding is to be done by government vs. by the productive (i.e., private) sector. This would involve a whole sub-formula, it would seem, and a “loop” that analyzes whether to maximize the public or private sector funding of these needs first, using the other source as an alternative once the primary source stops growing.

But what a great tool it would be! We could see when things are projected to shut down per the formula, and then just argue about the assumptions shaping the inputs. I see that as a lot more clarity of discussion than we have now in our society. And that would be good!

Jim Hirshfield