If the Federal government pays down debts with surplus, at least 5 possible impacts will result. These impacts are not mutually exclusive. In fact they may exacerbate each other.
1) Federal debt pay down can take several forms: Reduce further borrowing, putting downward pressure on interest rates and downward pressure on the exchange rate of the dollar. A Shift between short term and long term treasuries offerings, altering the yield curve. The power of this decision rests with the Treasury Dept. It can prevent the reversed yield curve to lessen the prospect of recession. (short term yeild should normally be lower than long tern yield; when this relationship is reversed like now, historical data say there will be a recession after the next 3 quarters),
2) Federal debt pay down will result in a shift in the credit pattern in the economy. The funds can go into other public debts, e.g. state and municipal, public authorities pushing down tax free yields. The expansion of this tax free pool will also reduce Federal tax receipt, reducing the ability to pay down Federal debts.
3) The released funds can go into private debts. this will lower private borrowing cost, cause equity asset value to rise as a result of a rush from equity offerings to debt financing. Loss shares are available, prices go up. Easy credit also encourages risk taking.
4) The released funds can go into the equity market, driving up prices by increasing demand on a fixed pool, causing P/E ratio problem down the road, 3 quarters later, a price adjustment based on earnings will be inescapable. Massive capital loss follows.
5) The release funds can go into structured financed instruments. the Re-emrgence of super hedge funds. A wild card, speculative musical chair where all the players are handcuffed together, while the number of chairs keep reducing.
Bottom line, the released funds can only go into new debts, but not equity. But the new debt will demand higher returns, leading to a speculative bubble.
5a) The released funds can leave America and go back to Japan! - Worse case scenario.
If someone has to borrow, the Fed is the best candidate. And someone has to borrow in our system, because debt now runs the system. A reduction of debt will shrink the economy. And soveriegn debt is the cheapest. Two things will stay as long as capitalism is alive: taxes and debt. It all just accounting gimmicks, not more than that. Conclusion, Federal debt pay down is a bad idea.
As for the flat tax, conceptually, Doug is correct, it is regressive. But you have to ask compared to what? Compared to the current tax structure, it may well be progressive, because in practice, the rich can avoid taxes better than the lower income erners under the existing regime, so anyone grossing over $1 million pay effectively much less than 20% of the gross with 33% of taxable. The low income earners who let HR Block or Turbotax do their taxes will pay the full scale. If a flat tax truly eliminates all deductions and tax planning gimmicks, the bottom line at the end of the day is not as clear as Doug would have us believe.
Tom, you are right, more good labor laws are needed, goes without saying. Still, the right to organize and collective bargaining are not enough. You have a "if you don't smoke, some one else will" problem with contract negotiations. Labor cannot win in contract negotiations, the best it can do is come out losing less, because without legislation making certain conditions illegal, those condition will become the norm above which the companies will claim they will lose money. If productivity increases 100%, management will say return on capital requirement now in the industry has gone up to absorb 80% of surplus value. So there must be a law that says a 70% jump in profit is illegal (excess profit tax) unless half of that goes to labor before it goes to dividends or acquisitions.
Max, don't sell Armey short. There is a lot of Texas populism in him that labor should exploit. His disdain for Wall Street and Eastern liberals and big business (even big oil) can work to labor's advantage. The left must unite all who can be united. A 3% prime rate is not radical. The EU target is 3.5%. Asia is aiming at 3.5% as well. Also, a high single digit inflation (7-8%) is good for the poor and SS receipients.
It is the policy of the Federal Reserve as defined by the Full Employment and Balanced Growth Act of 1978, known as the Humphrey-Hawkins Act, to maintain 4% unemployment. HH introduced the term: full employment, as a policy goal, although the content of bill had been watered down before passage to consider 4% unemployment as structural. Now "full" employment is defined at 4% unemployment. Any level near or below that is economically inconsistent, due to its impact on inflation (causing wages to rise!), thus increasing unemployment down the road. Labor should fight to change this insanity.
Daniel, the VAT can be progressive if it is not a flat VAT. A progressive VAT (the rate goes up with the price) can have a luxury tax built into it. So a person buying a $110K Mercedes will pay 30% compared to 4% for a pair of jeans.
Anyway, the point is to keep talking and proposing and working on congressional staffs, and not just write a paper and file it away. Doug, who is very smart, should do less policy analysis, and more policy formulation.
Remember, the income tax was first introduced in 1862 and abolished in 1872. Another try to reinstitute it in 1895 was rule unconstitutional by the a 4-5 decision of the Supreme court. In 1913, to compensate for the anticipated loss of revenue for the Underwood Tariff (reduction) Act, the act included small income tax , as authorized by the 16th Amendment. It grew into the monster that it is today. The left should seize this hated income tax and build a rallying cry, instead let the right commandeer it. I know, Doug, its bad economics, but good economics don't make revolutions. The Corporation profit tax is the only progressive tax. The income tax is a clear example of double taxation. All populist movements should oppose it. Hey Doug, how about a progressive graduated tax cut - 30% for low incomes and 5% for high incomes.
Henry
Max Sawicky wrote:
> > If instead of borrowing money the government pays back debt, who will
> > borrow that money the government is paying back? Or will it stuff sugar
> > bowls?
>
> Bondholders will have to find other financial assets to buy if they don't
> spend down their wealth. This would bid up the prices of assets,
> make for a more bubbly and volatile financial market,
> foment some wacky investment projects and some profitable ones,
> and if Keynes was right reduce employment to some extent. If
> Keynes was wrong and today's economic mainstream is right,
> the profitable investments will be sufficient to augment economic
> growth, as it is conventionally defined. I'll leave the Marxist
> scenario to others.
>
> mbs