East Meets West Logic...

[Lloyd Gillespie]

Paul Davidson

Making Dollars and Sense of the U.S. Government Debt...

Abstract: This paper explains why, given Keynes’s General Theory, worries over

the size of the government’s national debt per se is foolish. It is more important

to educate politicians and the public that government fiscal policy should be designed

to make sure that aggregate market demand will produce sufficient profits

so that entrepreneurs will hire all domestic workers willing and able to work.

Empirical evidence is provided to demonstrate the correctness of this concept

of fiscal policy of the balancing wheel for full employment effective demand.

Key words: deficits, national debt.

No economic topic encourages more political demagoguery than the

“unsustainable” national deficits that face the Obama administration as

it tries to extricate the economy from this Great Recession that began

in 2007. Even President Obama has appointed a commission to develop

a plan to assure a reduction in future deficits by lowering government

expenditures or raising taxes.

A sage once said, “Those who cannot remember the past are condemned

to repeat its errors.” So let us review the past history of the national debt

to make sure we avoid its errors and repeat its successes.

Is the national debt too large? In 1790, the newly founded U.S. government

assumed the debts that had been incurred during the Revolutionary

War. Thus, from the very beginning, the U.S. national debt was

approximately $75 million. In 1835, President Jackson reduced the debt

to close to a zero balance. By 1837, however, the economy went into a

steep recession that lasted approximately six years and the national debt

increased dramatically. Since then, the U.S. government has always had

a significant outstanding debt.

During World War I, the national debt increased substantially from approximately

$6 billion in 1916 to over $27 billion in 1919. The prosperous

decade of the “roaring twenties” saw a decline in the national debt

as tax receipts exceeded government spending. By 1929, the total debt

had been reduced to $16.9 billion. This 1920s experience indicates that

when the private sector is spending sufficiently to buy all the products

that industry can produce in a fully employed economy, then there is no

need for the government to deficit spend merely to maintain a prosperous

economy. The 1920s prosperity, however, was partly the result of

significant bubbles in the stock market and in real estate. (Shades of the

dot.com bubble of the 1990s and the housing bubble of early 2000s.)

In 1929, private spending suddenly slowed causing a devastating drop

in business profits. Unemployment rose rapidly as the United States

entered the Great Depression. Tax revenues fell from $4 billion in 1930

to less than $2 billion in 1932. When Roosevelt took office in 1933, the

national debt was almost $20 billion; a sum equal to 20 percent of the

U.S. gross domestic product (GDP).

During its first term, the Roosevelt administration ran large annual

deficits between 2 and 5 percent of GDP. By 1936, the national debt had

increased to $33.7 billion or approximately 40 percent of GDP. Many

“experts” of that era said disaster awaited the nation if the government

continued to deficit spend and thereby burden future generations with this

huge debt. Accordingly, as a part of his reelection campaign, Roosevelt’s

fiscal year 1937 budget submitted to Congress in 1936 cut government

spending dramatically. As a result, in 1937, the economy fell into a steep

recession. Tax revenues declined and the national debt increased to $37

billion. The government resumed significant deficit spending in 1938

and the economy quickly recovered. By 1940, the economy had grown

substantially while the national debt rose to $43 billion.

When the United States entered the war in 1941, the fear of deficits and

the size of the national debt were forgotten. The important thing was to

defeat the enemy. In the war years from 1941 to 1945, the GDP doubled

while the national debt increased by more than 500 percent as Roosevelt

financed much of the war expenditures by government borrowing. By the

end of the war in 1945, the national debt had increased to $258 billion

and was equal to approximately 120 percent of GDP.

[Lloyd Gillespie]

Rather than bankrupting the nation, this large growth in the national

debt promoted a prosperous economy. By 1946, the average American

household was living much better economically than in the prewar

days. Moreover, the children of that Depression–World War II generation

were not burdened by having to pay off what then was considered

a huge national debt. Instead, for the next quarter century, the economy

continued on a path of unprecedented economic growth and prosperity

with the Eisenhower administration launching the biggest public works

project—the interstate highway system—and the Kennedy–Johnson

administration spending large sums on sending a man to the moon and

the escalating Vietnam War. At the same time, the inequality in the distribution

of income was significantly narrowed. It was the golden age

of economic development for the United States as the rich grew richer

while the poor gained even more in a rapidly rising level of income that

created a large American middle class.

As a child of the Depression and a young teenager during the World

War II, I have never felt burdened by the huge government deficits that

accrued due to government spending during the Great Depression and

the war that followed. The legacy that the Great Generation who were

adults during the depression and the war left to their children was an

economy of abundance and prosperity. I inherited an economy that made

finding a good job easy for me and all of my cohorts and provided excellent

opportunities to improve our living standards. If this is burdening

children and grandchildren, I hope the current generation can create such

a “burden” for their progeny.

The moral of this history of the national debt and the economy during

the Great Depression and World War II is that we have nothing to fear

about running big government deficits when, during a recession with

significant unemployment, the federal government is the only spender

that can take the responsibility to sufficiently increase the market demand

for the products of our industries and thereby maintain a profitable entrepreneurial

system. For government to spend less in the hopes of keeping

down the size of the national debt will cause market demand to remain

slack, thereby impoverishing both our business firms and our workers.

The idea that capitalism works best when spenders cause healthy growth

in market demands and thereby generate profits and jobs for the community

was the basic message of Keynes theory.

This was clearly demonstrated when government spending increased

during the years 1933–36 and 1938–45. When Roosevelt cut spending

in 1937, the sharp recession showed that at that stage of recovery, no

other spenders were willing or able to take over from government the

role of generator of market demand and profits for American businesses.

Had Roosevelt, in 1938, continued on the path of keeping government

spending in check in order not to increase the total national debt, the

result would have been to propagate the poorly performing economy

of 1937. When the war broke out and no further thought was given to

the size of the national debt, government spending quickly pushed the

economy to a profitable full employment status. Keynes’s ideas that the

role of government fiscal policy was to make sure that the total demand

for goods and services provided profit opportunities to encourage business

firms to hire all workers who wanted a job was validated by this

historical record...

[Lloyd Gillespie]

Business firms will hire more workers only when they expect the market

demand for their products is increasing. Today, who are these buyers who

will be willing to buy significantly more products from factories located

in the United States in order to end this Great Recession? Clearly households

suffering from high unemployment, decreasing market values for

their homes, large credit card debt, and shrinking pension funds are not

likely to rush to buy significant more goods and services. Entrepreneurs

with existing excess facilities and facing declining or at most not rapidly

rising market demands are unlikely to invest significantly in new plant and

equipment. Moreover, foreigners such as China with its large savings of

U.S. dollar earnings appears unlikely to spend more dollars to buy more

U.S.‑produced goods. With falling property and sales tax revenues, local

and state governments such as California are cutting spending on public

services and reducing purchases from domestically located firms. Only

the Federal government can afford to buy significant additional products

to stimulate market demand for American products.

Just as we expect the Federal government to spend whatever is necessary

to protect us from foreign enemies during a war, we should also

expect the government to spend whatever is necessary to protect us

from the economic terrorism of a great recession. The public must be

educated to understand that a civilized society is one that assures both

domestic workers and enterprises prosper and that the intelligent use of

government fiscal policy can assure that total market demand is always

sufficient to generate domestic profits large enough to create a fully

employed economy.

Some argue that tax revenues must finance all government spending

so that the federal budget is always balanced without deficits, or at least

annual deficits do not increase the debt-to-GDP ratio. As history shows,

however, even during World War II when America was attacked by foreign

nations (remember Pearl Harbor?) the U.S. government did not finance

the entire defense of this nation by raising taxes. Instead, during the war

years, deficits expanded dramatically while no one worried (correctly)

about burdening future generations with debt.

If wars are not sufficient (or necessary) reasons to raise taxes or cut

government spending sufficiently to balance the budget while protecting

the nation, then why should defending the nation against serious economic

threats require a balanced budget or a lower deficit? Our politicians and

the public must be educated to understand that when total demand for

domestically produced goods is low so that recession and depression

threaten, then government must deficit spend as much as necessary to

encourage domestic entrepreneurs to hire all American workers who

are willing and able to work. If, on the other hand, market demand for

domestically produced goods and services exceed America’s full employment

productive capacity, then government must increase taxes and

reduce spending in order to reduce aggregate demand to a level that can

be met by a fully employed labor force.

When the public and politicians recognize that a primary function of

government fiscal policy is to act as a balancing wheel for aggregate

demand to be sufficient to encourage America’s entrepreneurs to create

jobs for all our workers, we will have developed the political will to

develop a perpetual prosperous American civilized society.

At that point of time, our next task will be to develop an international

financial and payments system that will provide for global full employment

and prosperity.

[labelwench]

The topic of fiat currency and how it's value is determined in the marketplace comes to mind.

As it is government that prints the money and monitors it's circulation, setting interest rates etc., the true question becomes one of confidence in the leadership, to my mind.

The only reason that money has any 'value' at all, is by mutual accord and the fact that it is more convenient than chattel for most exchanges. We are rapidly moving toward a digital era of transaction, with no currency required.

So what exactly are we assigning the 'value' toward?

I would suggest that in utilizing any kind of exchange system, we are recognizing both natural resources (from which all commodities are made) and sweat equity (including 'intellectual' efforts).

When we employ deficit financing during times of need, we are borrowing against future ability to repay to cover off a time of scarcity.

This is actually a model in nature, although more evolved in that we endeavor to assist as many as possible through this transition. Nature is more cavalier. Life either makes it through or not. Plenty more where that came from to nature's way of doing things.

Suppose we lost all faith in our governments and the 'value' of money? The grid goes down and we can't access our virtual millions. What is of value now?

Anything that will sustain life, for starters, and that can function without power or fuel. Natural resources and sweat equity are the bottom line supporting all of our labor saving technology and economic models, IMO.

A thought provoking song by Bertie Higgins, which speaks to the East-West situation that both of our nations are presently involved in.

http://www.youtube.com/watch?v=xblm2...eature=related

[Lloyd Gillespie]

I agree Lorrina, it's Natural resources and sweat equity are the bottom line supporting all of our labor saving technology and economic models...but what other entity would we use to distribute labor, goods and services in such a huge and complex world...? Even if we go to blips on a computer screen, it'll still act identically to the money and law systems, we presently employ__So, the only solution is to simply improve the mechanical functioning of the present system__since any possible imagined replacement will be the same... This doesn't mean the changes we are looking for shouldn't be reformulated on a much more fair allotment to all concerned__It simply means we must devise systems that are capable of removing the insanity of the super-rich, having the ability to use derivatives contracts, to actually indirectly print their own profits, out of the government coffers of all the unsuspecting poor and middle-class taxpayers__This is our present reality... Iff we build better systems of law and finance, the weaker variable psychologies of the lesser educated, will not only see these clear new advantages, but will actually follow such sound fundamentals, imo... The problem at present is, we have no sound fundamentals to follow, except helplessly watching the Super-Rich implode the entire system in on all of us__including themselves...

We've all got to awaken to the real voices of sound thinking and ideas, that can actually make a difference, to make any difference at all__Don't you think...???

All emotional psychology must eventually be curtailed into either variable or fixed law__I prefer variable sliding time scale laws, at minimal percentages of change per year, not to collapse the entire system... That would be about 10% per year law change, to accomplish a 100% change over ten years__It's a safe and sound system Paul Davidson and I suggest, and there are many others suggesting similar law changes, but not the Obama administration yet__with all his hanger-oner' political henchmen, from past eras, still all living far too far in the past... This is the computer age, and we need the White Borg to walk onto the world stage, and defeat the Black Borg, and that's not referring to the Obamas__It's referring to good intelligence over-coming bad intelligence...

But how one would get an under-educated world to recognize good intelligence, over bad intelligence__Is beyond me... I really think it's going to take a total collapse, with millions starving to death in the streets, before the world awakens to the possibilities of true and good computerized logic, intelligence and truth...

Everyone should realize, there's no other nation yet financially large enough__to wear America's credit shoes...

Btw, good song choice...

Thick As A Brick__ http://www.youtube.com/watch?v=toHlMD50eYY

The topic of fiat currency and how it's value is determined in the marketplace comes to mind.

As it is government that prints the money and monitors it's circulation, setting interest rates etc., the true question becomes one of confidence in the leadership, to my mind.

The only reason that money has any 'value' at all, is by mutual accord and the fact that it is more convenient than chattel for most exchanges. We are rapidly moving toward a digital era of transaction, with no currency required.

So what exactly are we assigning the 'value' toward?

I would suggest that in utilizing any kind of exchange system, we are recognizing both natural resources (from which all commodities are made) and sweat equity (including 'intellectual' efforts).

When we employ deficit financing during times of need, we are borrowing against future ability to repay to cover off a time of scarcity.

This is actually a model in nature, although more evolved in that we endeavor to assist as many as possible through this transition. Nature is more cavalier. Life either makes it through or not. Plenty more where that came from to nature's way of doing things.

Suppose we lost all faith in our governments and the 'value' of money? The grid goes down and we can't access our virtual millions. What is of value now?

Anything that will sustain life, for starters, and that can function without power or fuel. Natural resources and sweat equity are the bottom line supporting all of our labor saving technology and economic models, IMO.

A thought provoking song by Bertie Higgins, which speaks to the East-West situation that both of our nations are presently involved in.

http://www.youtube.com/watch?v=xblm2...eature=related

[labelwench]

But how one would get an under-educated world to recognize good intelligence, over bad intelligence__Is beyond me... I really think it's going to take a total collapse, with millions starving to death in the streets, before the world awakens to the possibilities of true and good computerized logic, intelligence and truth...

Originally posted by Lloyd Gillespie

While I was harvesting greens in my garden a short time ago, a thought came to me in regard to an analogy that I would like to post, and upon returning to check on the forum, you had made this post, which provides the tie-in.

My greens, you see, have been too successful, with the result that they are now competing for space and resources, and each is unable to reach it's full potential.

Left as they are, they will soon begin to choke each other out, and the benefit to me will be considerably lost.

Therefore, I must harvest selectively and kill some of them now, to improve the circumstances for the remainder. The remaining plants, having already been forced into competition will likewise not attain their maximum form of perfection, yet they will maximize the remainder of their growth cycle to my greater benefit.

In nature, conditions are seldom optimum for all species simultaneously, or even for all individuals of any one species, there being so many variables interfaced.

When I observe the circumstances of the world around me, I very much understand the challenge that the world's best intelligences are facing. My thoughts are that there is very little that can be done, save by individuals coming to the realization that their future lies in their own hands, and that they must change course and hope that enough others will follow their lead.

We cannot save them all. Nature would not even try.

Yet, for all that there is the potential for things to get very messy, some will make it through this next cycle of challenges.

For that reason, we keep putting our thoughts, ideas and actions forward, because if even a few pick up on them, we have the potential to make a larger difference than we may ever know.

We have no true idea of how many people around the world may be giving some consideration to our words, even as we post them......

[racecar]

EXPLOITING CHAOS by Jeremy Gutsche http://www.slideshare.net/trendhunte...trendhuntercom

Chaos (kā,äs) is the uncertainty sparked by uncharted territory, economic recession, and bubbles of opportunity.



#12 A BIT OF HISTORY “It is not the strongest of the species Even the clever that survives, nor the most intelligent, but rather the one most adaptable to must adapt change.” —Charles Darwin


#17 A BIT OF HISTORY The only things slowing you down are the rules you need to break the Path to growth is full of obstacles, but it’s not impenetrable. Your company could increase its innovation budgets, take risks, encourage failure, advertise, hire talent, invest in technology, etc. X The problem with all this advice, you are saying, is that it seems unrealistic. At least, it seems unrealistic within my organization. 38 We’re too big. We’re too small. We can’t do that. We tried that before. I can’t make a decision that senior. We’re just starting out. We don’t have that much money. Our investors would never allow that. The pursuit of opportunity will require you to think differently and break the rules that paralyze change.

Under-educated, I wanted to know more about capitalism...http://www.capitalism.org/ .....I took the tour and am reading some of the articles.....................(thinking)

What is it about the word "illegal" that Mexicans* don't understand?

http://www.seattleweekly.com/2006-08...ejo-baboso.php

*...

[labelwench]

Times of instability are the threshold of change and great opportunity for those who recognize and pursue new avenues. Yet who decides on what these new directions should be?

That part historically doesn't change.

The person who foots the final bill, is ultimately the one who drives the direction of change.

Some interesting and entertaining material in your post, Racecar, thank you. Here are the Top 20 trend predictions for 2010 by Jeremy Gutsche:

http://www.youtube.com/watch?v=goMoO...eature=channel

[G_burnett]

"...economics is not a predictable science but a coin toss
as it be a coin you toss perhaps you should change the coin
but then it would still be a coin
thus you can only smile
for it will increase your face value."
sage

[Lloyd Gillespie]

"...economics is not a predictable science but a coin toss
as it be a coin you toss perhaps you should change the coin
but then it would still be a coin
thus you can only smile
for it will increase your face value."

sage

"The entire world's uncertain psychology always follows the strongest
fundamentals__That is absolutely predictable__It's what
made/makes America great..."
sage ii