Asymmetrical Information

As long as no one minds the current deficits, we don't have to pay them down right now. It *is* magic and pixie dust, a'la "sunspot" models. In that regard perhaps my view differs slightly from Jane's. But we do run the risk that investors will start minding them, and surely that is not p = 0.

Winterspeak - Well said!

Jane - Hand on heart, I'd really like to hear your answers.

I think that there is a chance that a balanced budget could restrain spending. If the democrats who really believe in Rubinomics could combine their influence with the small government Republicans, the balanced budget caucus could be influential enough to restrain spending. This may have to wait until 2009 as GWB is probably too preoccupied w/ the GWOT to provide leadership on this issue.

If ... , the balanced budget caucus could be influential enough to restrain spending.

You're quite likely right about that, but your statement somehow omits the very important phrase "for a little while" at the end. The chance that such resolve would hold for the long term is, IMO, vanishingly small.

true story: i'm buying a car, subaru has a 0.9% financing option. the guy says "how much you want to put down?" i say "how much do i have to?" he says "nothing." i say "nothing." he says "finally someone gets it." why shouldn't the US act similarly and borrow while the borrowings good, hope to grow it's way out of it, particularly where government has shown no spending restraint, regardless of who's in power.

"Pay as you go" sound fine but I'm wondering if certain government purchases should not be funded by purchasing bond and incurring a deficit? The libertarian principle of "user pays" would apply to future generations for such items as post offices, interstates, schools, aircraft carriers, etc. that will be part of the infrastructure for years to come. Maybe government spending needs to be separated into operating expenses and capital expenditures?

debt is a bad example. average jane/joe max's out 5 cards without a care in the world. Looks to gov as an example. "Greed is good?"
DEBT is GOOD!

Your second to last paragraph really nails it. This is the ultimate stake in the heart to arguments that we should raise taxes to balance our spending. Paraphrasing you:

Would raising taxes to balance the budget do anything in the long run to limit new deficit spending, or would it simply result in a new deficit with higher overall spending?

If you raise taxes, the government won't reduce the deficit. It will just find new things to spend the extra money on.

Creech,

Re; "Maybe government spending needs to be separated into operating expenses and capital expenditures?"

Interesting. Where would you place entitlements?

> The libertarian principle of "user pays" would apply to future generations for such items as post offices, interstates, schools, aircraft carriers, etc. that will be part of the infrastructure for years to come.

Individuals have incubation, production, retirement - societies don't, at least not in the short term.

For a society in steady-state, pay-as-you-incur-costs for infrastructure vs deficit funded infrastructure is basically a wash. However, "gifting" the future is likely to be more realistic because that gift seems to have more current consequences than interest payments. Plus, the folks making the decision get to bear the costs. (If the infrastructure we build is wrong, why should the future pay for it.)

Deficit spending for expansion seems attractive, but the greater the expansion, the more likely that the spending will be wrong and should be delayed.

Andy - interesting point. While some "wrong"
infrastructure decisions could be corrected fairly easily - like unneeded school buildings sold off for condos - others can't be - such as
unneeded aircraft carriers. Who knows what the needs of future voters will be? Just another reason for restraining government and putting as many infrastructure decisions as possible into the hands of the free market so that mistakes impact the specific shareholders and investors instead of all of us.

Randy - entitlements would have to actuarily funded, much like private pensions are (or are supposed to be.) One can pretty much determine whom the future users of those entitlements will
be (age based ones, anyhow), but that begs the question of how users could pay for their future use when taxes are uniform on everyone at the time. One solution is to privatize entitlements so "premiums" would be actuarily sound for each
individual.

I always assumed that most of the people on these boards were American, but most of our anti-tax posters talk about a balanced budget as a restraint on spending as though it were theoretical. Don't most of us live in states with balanced budgets? Isn't it harder to raise spending in those states because of the need for coincident tax increases or spending cuts elsewhere?

Balance the budget. Put PAYGO back into effect. This is not an untried solution. It works in the states. It worked in the 90s.

As imperfect as they are, and as ineffectual as they currently seem, I do not know of a better mechanism to constrain spending than deficits.

Think harder. It rhymes with givided dovernment.

Somebody with better math skills can follow this up, but I just ran a correllation between the deficit (as a % of GDP) and outlays (as a % of GDP), and I'm not finding a negative correllation. In fact, I'm finding a hugely positive one.

I tried lagging it by a year, but I'm still getting a huge positive correlation. Is there any empirical evidence that deficits restrain spending? This evidence would seem to suggest the opposite.

I believe interest is currently about 16.5% of tax revenue and that a large portion of our debt will be expiring in about 3yrs. So, even though interest rates are low, we never locked them in. Interest will eat up even more of our tax revenue even if we don't run a deficit if we don't shift to a longer term debt structure.

I've re-run the correlation with deficits (as a share of GDP) versus the increase in real outlays, and I'm getting correlations near 0 -- no evidence that deficits increase spending (what I'd found before), but no evidence that they reduce it either.

dj superflat, you might want put the depreciation money into an account so it will be there if you want to sell your car.

Prediction:

Over the next three years, builders and home-buyers will increasingly have to compete with the government for long term debt.

aaron --

there seems to be a faulty assumption underlying your comment, because it's fairly obvious that if even a checking account will beat the interest on the loan, i keep the money myself and pay as i go. as for assuming i'm just going to spend the money at vegas (or like a republican congressperson), and thus be stuck if i need to sell, unlike the government, i have more than enough money to pay the debt, just no reason to do so where i actually make money by not putting any money down. but thx for your concern.

That's what I meant... Don't spend it.

Neglecting to pay back aggressively is one thing, but where is the rationale to be borrowing more? We are not talking about profitable investment here. We are talking about government projects.

I see no rationale to pile on more debt endlessly. We should pay it back eventually, yes? And why not start now, while we have a good economy? Why shove a huge debt onto our kids, *regardless* of the economic forcasts? I'd rather they have great prospects *and* no debt we gave them.

Repeat after me: Decreasing an increase is not a decrease.

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