"Economic Stimulus vs. Greater Federal Debt" (a CITS DEBT WATCH)

**                                                              **
                    W. Curtiss Priest, Ph.D.
          Center for Information, Technology & Society
              466 Pleasant Street Melrose, MA  02176
  E-mail: BMSLIB@MIT.EDU, Voice: 781-662-4044, FAX: 781-662-6882


                            May 1, 2003

                         Public Issue #99:

                          CITS DEBT WATCH

              "Economic Stimulus vs. Greater Federal Debt"

           Commentary by Dr. W. Curtiss Priest, Director:

Perhaps there is no greater contentious debate than the one
that pits 'economic stimulus' against incurring greater
federal debts.

In preparation of a book ("Lithium: Debt in Crisis") I
have added several hundred books to the CITS library on
finance, banking, and depressions.  And, in the last
day I reviewed John Kenneth Galbraith's masterful book
"The Great Crash: 1929."

I have two comments about his book.  1.)  Galbraith chides
the Hoover and Roosevelt administrations for steadfastly
attempting to bring stability by avoiding federal deficit
spending.  It is clear that Prof. Galbraith believed, in 1954,
that a more enlightened approach would be a Keynesian solution,
where the government spends "into the depression" in an attempt
to prevent it from persisting.

And while such a position makes sense when a federal government
has a surplus to draw upon, it is not clear that it makes
sense when the level of government debt is over one half of
the total, annual GDP of the economy ($6 trillion compared
with $10 trillion).

Secondly, 2.)  Galbraith cites from Babson, but wholly misses
Babson's sensitivity to credit over-extension in 1928.  In
fact, Prof. Galbraith misses any and all effects of consumer
and corporate debt on the creation of the Great Depression.

So while Galbraith's book is, indeed detailed about events
in and around the crash, it is deficient in recognizing the
presence of debt (except for margin lending) in the ensuing
crash and depression.

I introduce this current newsletter with this indictment as a
prelude to a series of presentations made in the U.S. House
by various Congressional representatives concerned about
the addition of $1 trillion of debt to the current U.S. federal
debt, just in this year.

To a House floor Bobby Scott (D-Virginia), Brian
Baird (D-WA), Tom Allen (D-ME), David Price (D-NC),
Tammy Baldwin (D-WI), John Spratt (D-SC) and Ed Case (D-HI)
addressed this nation's greatest threat -- the "addition of six
trillion dollars of federal debt over the next 10 years, to the
existing six trillion dollars of current federal debt."

A prior presentation by others before the House floor was
summarized in our DEBT WATCH issue of April 10th:

http://csf.colorado.edu/forums/debt/archives/msg00767.html

Here, as in the following discussion, our Representatives
struggle with the 'promise of stimulus' versus the burden
of debt.  The consensus of this group is that very selective
tax reductions will produce the necessary stimulus and that
most of the proposed Bush tax reductions will go to those
who are so well off that further reductions in taxes will
have little beneficial effect.  Price, e.g., showed that
the real tax break of $30,000 would go to the upper 1%
of the population who comprise the upper 1% of all income.
Other reductions in lower brackets were "insignificant."

Rep. Scott discussed how U.S. trust funds face a tax
deficit.  His major concern was how much greater increases
in the federal debt would affect the ability for "baby
boomers" to retire.  He asked "how bad does it have to get"
to see that further debt imperils Social Security.  Mr.
Scott showed several charts regarding debt and revenues.

Rep. Baird presided and passed the floor to Rep. Allen
who referred to an "awfully big debt."  Rep. Allen
referred to the question whether we faced "growth or greed?"
He also showed charts that indicated that real GDP was
worse in the last few years than anything since WWII.
(Rep. Allen also extensively spoke using charts)

Rep. Price question the stimulus projections in the "Senate
Budget and Priorities" documents.  He described how the
'stimulus package' was not one, and referred to this behavior
of the administration as a "Me, First" response.  He wondered
how education, job training, and even fuel assistance will
be attained in this climate.

Rep. Baldwin referred to the current loss of 2.3 million
jobs and that the current tax cuts were "not a stimulus
plan" and that we should worry that we are "on the wrong
path."

Rep. Spratt (on the House Budget Committee) described how
the current $6 trillion in Federal debt will spiral to
$12 trillion by 2013.  He cited the fact that the CBO
was optimistic about the year 2003, but that just the
numbers reported from January to March of 2003 suggests
a $5.4 billion short-fall, or a $92 billion short-fall
projected for the year.  He commented that some 80
million baby boomers are headed for retirement -- a level
of Social Security support that will be double the current
levels.  He asked that we "not mortgage the future."  He
indicated that a much more selective stimulus plan, costing
1/7th the current proposed amount, would produce twice
the effect on stimulating the economy.

Both Representatives Price and Case also addressed the
serious issue of reducing taxation and the negative effect
on our ability to support the future.  Price said, "stop
digging a hole."  Rep. Case likened our defense spending
to that of the USSR, where a country overspent on defense
at the expense of ruining the economy.  He asked, "are we
on the same page?"

We note, for the record, that as of 9:30 AM (EST), there have
been no newswire coverages of this event.

Our nonprofit must ask the question why both this presentation
of 7-8 PM (EST) on March 30th on CSPAN, and the prior one on April 9th
have received so little press coverage?

Are we lemmings that will surely dive into the sea?

For the record, CITS is in favor of Keynesian spending, when,
and only when, there are not already massive levels of
indebtedness.

At some point, further tax cuts simply rob the nation of
vital services, and provide no further stimulus.  It is
the role of government to provide what the "market" cannot
or will not.  But, with massive debts there is little that
further deficit spending can do to "spark an economy."  An
economy much more depends on households and corporations with
low enough debt levels to continue expenditures.  Corporations
will invest in capital and plant, if they believe consumers
are not "tapped out" and firms are not overly debt-ridden.  And
consumers will continue to spend, if their outlays are not tied
to home equity loans and the "wealth effect" of their home owning.

If, however, debt has climbed precipitously, then, the time
to have done something about the economy was about twenty
years ago when "debt financed, leveraged buy-outs" appeared
and when households (cleverly?) learned that they could have
their cake (their homes) and eat it too (have monies for
spending by extracting equity from overly-priced real estate).

No.  We cannot go back twenty years and "reset the clock."
What is done, is done.  We now live with the consequences.

**********************************************************************

Previous issues of (all) the CITS DEBT WATCH:
    http://groups.google.com/groups?q=cits+debt+watch&hl=en&scoring=d

The entries appear in reverse chronological order, with the
most recent, first.

**********************************************************************


-- 


           W. Curtiss Priest, Director, CITS
   Research Affiliate, Comparative Media Studies, MIT
      Center for Information, Technology & Society
         466 Pleasant St., Melrose, MA  02176
   781-662-4044  BMSLIB@MIT.EDU http://Cybertrails.org