Posts Tagged ‘default’

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

The Emperor’s New Clothes

Saturday, July 9th, 2011


Ok, I am calling BS on the silliness of the debt limit “debate”.. We are told that our nation will default on its debt if the limit on the amount of debt allowed is not raised. Why would that be so? We could continue to borrow up to the present limit, so there is no need to default on repayment of principal. And interest? It presently constitutes less than ten per cent of annual expenditures. Why would the government fail to pay interest due? I guess because they are already borrowing 40 cents of every dollar of government expenditure, and they would elect to default rather than pay interest. But that’s a choice. As to default being the consequence of failing to raise the debt limit? It’s another story of The Emperor’s New Clothes.