Here is an editorial, “Deeper and Deeper” from the New York Times. The title is apt. The editors get themselves deeper and deeper into analytical trouble as they go along.
There is fresh evidence, if any more were needed, that excessive borrowing during the Bush years will make the nation poorer.
The NYT editors have yet to realize that what matters most is the size of the government budget, not how it is funded. If the borrowing will make the nation poorer, it is because the government is spending too much.
From the standpoint of a fixed government budget and the country as a whole, there is little if any difference between funding the budget with taxes or funding it with borrowing. Since the NYT editors are for increased taxes, they should not be worrying about the impact of funding those same projects with debt.
Hint: The present value of interest payments on debt is the proceeds of the debt. The present tax required to accomplish the same spending is the amount of the debt.
For most of the past five and a half years, interest rates have been low, allowing the government to borrow more and more — to cut taxes while fighting two expensive wars — without having to shoulder higher interest payments.
The NYT editors fail to appreciate the equivalence of funding spending with debt vs taxes. The additional interest payments from using debt are offset by the additional interest earned by taxpayers on funds they get to keep because they don’t have to pay the equivalent tax.
That’s over now. For the first time during President Bush’s tenure, the government’s interest bill is expected to rise in 2006, from $184 billion in 2005 to $220 billion this year, up nearly 20 percent. That increase — $36 billion — makes interest the fastest-growing component of federal spending, and continued brisk growth is likely. According to projections by Congress’s budget office, the interest bill will grow to $249 billion in 2007, and $270 billion in 2008.
So, one year’s increase is a permanent growth rate?
All of that is money the government won’t have available to spend on other needs and priorities. And much of it won’t even be recycled back into the United States economy. That’s because borrowing from foreign countries has exploded during the Bush years. In 2005, the government paid about $77 billion in interest to foreign creditors in China, Japan and elsewhere.
If foreigners buy US Debt, the US gets their money. US taxpayers do not have to pay now, either in the form of taxes or debt. The interest they pay later has a present value equal to the tax or debt they would have paid. Moreover, if the foreigners don’t treat us right, we can renege on the debt.
And that’s not the worst of it. While foreign investors were putting up most of the $1.5 trillion the federal government has borrowed since 2001, they were also snapping up hundreds of billions of dollars in private sector securities, transactions that have been a big source of the easy money that allowed Americans to borrow heavily against their homes.
Let’s see, having willing buyers for private debt makes it more difficult for Americans to borrow? Isn’t borrowing selling debt?
The result, as The Wall Street Journal reported last week, is that for the first time in at least 90 years, the United States is now paying noticeably more to foreign creditors than it receives from its investments abroad. That is a momentous shift. It means that a growing share of America’s future collective income will flow abroad, leading to a lower standard of living in the United States than would otherwise have been achieved. Americans deserve better than this financial mess.
The future collective income flowing out is offset by the debt proceeds flowing in now? If the consequence is a lower standard of living, it is due to a government budget that is too large, not how it is financed.
No comments:
Post a Comment