Big Picture Thinking

[Chaerophon]

The breakdown in this plan happened mostly during Clinton's reign, as we never actually paid down the debt, but started to divert the money into new government programs. Many politicos thought it was sufficient to get to a "balanced" budget, thinking it would be maintained in perptuity. Foolish.

If a nation can maintain a balanced budget, there is only one reason that it should pay down the debt - in order to lower its interest payments on said debt which will raise along with the nation's CPI/GDP deflator as the years go on. The relative value of the debt will not be "maintained in perpetuity", in fact, as time goes on, the relative value of the debt will fall to a point where it is actually cheaper to pay off the debt than it will be to continue paying off the interest payments. I agree, paying down the debt should be of some concern in an economy as it ultimately serves to somewhat lessen the load on future generations in terms of interest payments. However, considering the fact that surplus money could be used for a variety of purposes which may actually pay greater dividends in the future, both fiscal and social, than would the minimal reduction in interest rate payments on the debt load, (e.g. R & D, health care, lower taxation) the majority of economists that I have encountered would encourage only minimally paying down the debt with government surpluses and allowing its relative value to shrink while stimulating the economy in other ways and providing for social programs with the funds derived therefrom.

The fact that money injected into the economy by government in such a way is "multiplied" so to speak, through fractional reserve banking and other such factors is a benefit which gives investment and spending the leg up, when it comes to surpluses, over debt reduction. Given the fact that inflation will render it moot in the long term, and that it is a "one time only" expenditure that will not have the multiplicative effect of growth on the economy that can be derived from other expenditures, it can be argued with relative success IMO, that a redistribution of surpluses rather than paying down the debt will make the relative pain of paying down the debt and making interest payments lighter in both the short and long term.

However, as to your comments regarding the lowering of taxation: I would contend that the extensive overvaluing of stocks and their subsequent fall does not represent a "recession" of the sort that we are used to. It does, no doubt about it, represent a recessive market adjustment; however, due to the prevalence of insubstantial stock pricing in the gross overvaluation of the American economy rather than other factors that have been, traditionally, more indicative of actual production, it seems to me that the effects of this recession will be less substantially effected by lower taxation than what you think. I don't believe for one second that it is the car manufacturers or the oil companies that are paying for inflation here - it is the grossly overvalued tech stocks that vanished, disappeared into thin air that are having the detrimental effect on the economy and thus I doubt if the encouragement of an increase in capital stocks will have quite the dramatic effect that you argue it will. This "recession" is nothing more than the rapid elimination of much of the "chaff" from the market, in the form of insubstantial tech companies, that had previously existed, leaving you with more money than you have value. Period. Lower taxation will, no doubt, stimulate the economy. However, whether it will be able to make such a dramatic difference as you contend, is, I would argue, VERY debatable. The wealth upon which the economy had come to depend was not merely overvalued - it was completely nonexistent. Those companies that were of value remain, those that were not are quickly vanishing, leaving a void in the economy, but not devaluing more traditional stocks in any drastic way - they were not particularly overvalued to begin with. (although the fact of a fall in consumer spending and higher gas pricing will effect them to a certain degree) The people are feeling a pinch; however, encouraging investment in capital stocks through lower taxation will only stimulate the economy to a certain, less-than-desired extent - the rest will just take time. The question is - is a revival of EXCESSIVE deficit spending the answer? An increase in economic output will take time; in the meantime, interest payments on the debt are increasing rapidly and the expense of these policies may ultimately outweigh the benefit...