If the government spending/borrowing is “creating dollars”, and government taxation is “destroying dollars”, then what is the status of a dollar that is hoarded by corporate interests and/or the wealthy and held in Treasuries? Does this dollar still exist? And does that really matter if it never gets spent?

Seems to me that hoarding behavior is essentially comparable to taxation — it withdraws money from the active economy. The difference is that the hoarders have the right to reinject that money into the economy, at a time of their choosing.

Should China choose to sell its dollar holdings, that would be tremendously destabilizing. They won’t, because as a sovereign they have larger interests than a ROI. But corporations are more closely focused on their immediate profits…

We (my family) could triple our consumption for the next five to ten years, raiding retirement accounts and mortgaging the house. Would that be a choice that leads to wealth or poverty? I see this as analogous to the present course by the government.

If we believe the CBO, then the items outlined in the “fiscal cliff” essentially amount to borrowing $500B a year to increase our national spending by $500B a year. At the end of the year, the benefits of the spending have largely evaporated (we aren’t doing much for infrastructure) and the debt remains. You talk of a “return on investment”, but I see it more as pulling consumption from the future into the present. And once that debt-fueled consumption binge has run its course, we are definitely left poorer — paying for past excesses.

Am wondering how you can be certain that debt auctions will not fail for another 20 years? I’m not an expert, but I would have given us 5-10 years to work with. Which SHOULD be enough time, except that we don’t seem to be taking the challenge seriously.

So yes, sovereign borrowing is not truly analogous to household borrowing. Yet don’t massive sovereign debt loads have a crushing effect on the economy? Isn’t there the potential for systemic failure as the debt mounts?

Austerity is always painful, even when implemented gradually, but we need to make a commitment to move in that direction. Instead, our politicians (both parties!) are promising lower taxes.

You mention that a $500B federal deficit would be sustainable indefinitely, a number that probably isn’t too far off. Yet from FY2009 to FY2013, we’ve seen the deficits average $1.2T, and I’m not certain I trust the projected decline to “just” $900B for FY13. That is a pretty large gap to close.

And yes, if you fix the cost of health care, all our problems will be solved. Do you have an answer for that one that will get by this Congress? Unbelievably, Romney was campaigning AGAINST the most significant attempt to reduce the cost of Medicare. He believes we should be spending more, not less?

Totally agree. How we structurally get there is my difference with TFF – I don’t see why it is necessary to switch overnight, given the massive dislocation (i.e. pain) involved, if no one is forcing our hand.

“Borrow-and-spend makes us poorer, not richer.” Not normally, and not now.

Unless you think government spending has, on average, a negative return on investment, then you are not correct. And evidence is not with you on this point. You might be correct if you said “borrow-and-spend makes us less rich than we otherwise might have been”, assuming a healthy economy in which government spending crowds out private investment. When there is a demand problem in an economy and times are not great (eg. now), government spending (whether by printing currency, increasing the monetary base, or selling bonds – they are all the same) makes us richer than we would otherwise be. Forgone GDP is permanently wasted wealth that could have been.

Do you consider the UK (and the EU in general) fiscal response to be a success, compared the US?

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“I don’t believe we can continue to run trillion-dollar deficits indefinitely”

Why do you believe that? (seriously – I’m being Socratic). If you assume that government spending has a Real IRR greater than 0%, then we can certainly run a half a trillion dollar deficit in perpetuity. In about 25 years from now (time for GDP to double), the U.S. will be able to run a trillion dollar deficit indefinitely.

“I don’t believe the trillion-dollar deficits will end without either lower spending or higher taxes”

Arithmetically true. What does it mean when the government creates dollars faster that it destroys dollars, but at a long-term rate less that the economy itself grows? Understand that, and you will understand the true relevance of the long-term deficit.

Perhaps in common discussion of the deficit, a good question is: what spending? For instance, if the U.S. spent the same on per-capita health care as the rest of the developed world, the U.S. federal government would be running a long-term surplus, not a deficit. Does that require immediate painful action? No, it does not. It is a long-term goal, and we have a long-term to adapt.

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“Either lower spending or higher taxes will generate a “fiscal cliff” of some kind, but it has to happen nonetheless.”

There is no requirement, endogenous or exogenous, that requires any “cliff”. Who is forcing our hand to make significant changes all at once?

(1) Even the agree-on ‘fiscal cliff’ is not a cliff, but a slope downhill.

(2) There is no danger that a US Government bond auction will fail (be unbid) the next twenty years, at least. Zero. Who is forcing the “cliff”?

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“Projected drop of 0.5% in GDP vs. a projected ~2% rise if there are no changes, for a 3% impact.”

That is the forecasted effect of your “We desperately need a fiscal cliff”. I believe you are arguing against yourself.

In any event, that analysis is not relevant to your assertion that “Borrow-and-spend makes us poorer, not richer.” The CBO analysis means “deficit reduction in a bad economy makes us poorer,” and I couldn’t agree more.

It definitely doesn’t make sense for the strongest economy in the world to be a debtor rather than a creditor. Its not like we are in some race where short term performance matters, and in the long term it is better to be a creditor.

http://online.wsj.com/article/SB10001424 127887324439804578107280483982220.html

Projected deficit savings for 2013 of $503B.
Projected drop of 0.5% in GDP vs. a projected ~2% rise if there are no changes, for a 3% impact.

Or do you mean that statement requires sufficient argument? I don’t believe we can continue to run trillion-dollar deficits indefinitely, and I don’t believe the trillion-dollar deficits will end without either lower spending or higher taxes (or both). Either lower spending or higher taxes will generate a “fiscal cliff” of some kind, but it has to happen nonetheless.

[citation needed]

If I’m reading it right, the “fiscal cliff” is supposed to slash the GDP by 3% (compared to continuing the current policies), but would reduce the federal deficit by $500B.

Isn’t $500B roughly equal to 3% of GDP? It shouldn’t shock anybody to suggest that borrow-and-spend increases GDP by one dollar for every dollar borrowed and spent, should it?

We desperately need a fiscal cliff. The negotiations ought to be over distributing its impact as humanely as possible, rather than hoping to somehow avoid it. Borrow-and-spend makes us poorer, not richer.

1- There is no fiscal cliff, just a downhill slope.

2- We are told daily that we have a fiscal cliff crisis as well as a national debt crisis. People don’t seem to clarify that these two work against each other. Admittedly, the fiscal cliff, were it to happen, would be way too extreme and quick but it should at least be mentioned that it is the solution some are looking for to the debt problem.

3- I keep hearing recently how raising taxes for those making over $250k is pretty much the same as cutting their deductions. Sorry but it’s not. Certain deductions, specially the mortgage interest deduction, are flat whereas a tax rate hike would be progressive.

4- Agreed, we have a healthcare spending problem. What does that really mean? It means that we either have to reduce costs, which none of the current suggestions do or we would have to start denying treatment to some patients or most likely, we would have to transfer the spending burden from Federal programs to individuals. Why not just keep Medicare and Medicaid as they are and raise taxes regressively? It would be another way of doing the same thing.

http://blogs.reuters.com/felix-salmon/20 11/10/27/how-to-justify-groupons-valuati on/