Saturday, August 21, 2010
How do you reduce the national debt and is it desirable?
Let's face it, the only way to lower the national debt is by reducing the non-governmental sector's net financial balance. Why this is desirable I have no idea. Sectoral balances must equate to zero as a matter of accounting. If the gov't runs a deficit of $1 trillion the non-government (domestic plus Rest of World) runs a $1 trillion surplus. It is much more desirable, in my opinion, for the sovereign currency issuer to run a deficit than the private sector. We tried the latter and it didn't work out so well.
Republicans propose tax cuts combined with spending cuts, however, that combination adds no new net financial assets. It merely redistributes income. (You're giving money to some and taking money away from others.) Moreover, taxes do not fund spending under a regime of floating FX/non-convertibility. Taxes merely function to regulate demand.
The idea of raising taxes to "fix" the deficit and/or provide funds for the government to spend ignores the operational realities of the current monetary system where spending is not constrained (only politically, perhaps). Gov't "debt" is an asset of the non-gov't. Reducing gov't debt reduces the non-government's wealth, by definition.
Let's get real about this!