I would be curious to see someone who's both right wing and knowledgeable about economics try to counter the argument on the terms you specify. Unfortunately, they would all just sidestep the question about taxes and say that cutting spending is infinitely better for eliminating debt because government is Satan; and that would make the conversation much less interesting.

So, what do you think about the argument that the best way to encourage capital flows to "private investment targets" is for the government to take private money (lent to the government at dirt cheap rates), and spend it on public investments that employ people and increase demand, and make "private investment targets" safer bets than they currently are?

Yeah, I know about Keynesian economics, but that's not sustainable. It's a short term thing to avoid deflation. You have to balance the budget eventually, or at least keep the debt around a constant fraction of the GDP.

Also, In Jamaica, there's so little private investment because the government is a much safer bet and pays high interest rates.

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>> ^jwray:

Yeah, I know about Keynesian economics, but that's not sustainable. It's a short term thing to avoid deflation. You have to balance the budget eventually, or at least keep the debt around a constant fraction of the GDP.

Right, Keynesians say that too. Do temporary deficit spending to get out of the slump, and then balance budgets during the expansion.

To return to your original point, I don't understand how raising taxes and balancing the budget would change the thinking of investors when it comes to private investment.

Is the idea to try to starve the supply of long-term treasury bonds, and therefore drive their interest rates even lower? They're not going to totally disappear anytime soon, even if we miraculously start having government surpluses next year.

I don't see how that changes the thinking of investors -- the long term bond rates are already unusually low, and still they aren't going after more lucrative (yet more risky) private investments.

It seems like an expectation of disinflation or deflation would only increase the risk to entrepreneurs looking for an investor to borrow from, and therefore reduce their supply, therefore reducing employment...

In other words, it seems like it'd make our problems worse, not better.

If people aren't investing in T-Bills, they're either going to invest that money somewhere else or hoard it under their mattress. So deficit spending will help when confidence is low but won't be worthwhile at other times.

Ideally T-Bill interest rates shouldn't even be as much as inflation. You should actually have to make an informed choice and take a risk to make money, rather than participating in an ever-snowballing hereditary aristocracy.

"Do temporary deficit spending to get out of the slump, and then balance budgets during the expansion."

I prefer to watch the market correct itself, and always have a balanced budget where the government must spend only savings.

>> ^jwray:

If people aren't investing in T-Bills, they're either going to invest that money somewhere else or hoard it under their mattress. So deficit spending will help when confidence is low but won't be worthwhile at other times.
Ideally T-Bill interest rates shouldn't even be as much as inflation. You should actually have to make an informed choice and take a risk to make money, rather than participating in an ever-snowballing hereditary aristocracy.


The price on T-bills is set by auction, and I'm not so sure it'd be a wise idea to put a thumb on the scale with them. If we systematically undervalued them, then people who (randomly?) got them for less than others were willing to pay would just sell them to the people willing to pay more.

As for stopping a snowballing hereditary aristocracy, you can't eliminate the market for safe investment instruments entirely. For example, you can still buy Canadian debt, British debt, German debt, Japanese debt, AT&T debt, Microsoft debt, McDonald's debt, WalMart debt, etc.

Besides which, that's not how the snowballing hereditary aristocracies I'm familiar with have maintained an empire. Instead they hire talented people to manage their investments to maximize return while managing risk, and enjoy the endless flood of riches that result.

It seems like estate taxes, capital gains taxes, progressive income taxes and the like are the only reliable way to stop hereditary aristocracies from snowballing into virtual monarchies.

>> ^blankfist:

I prefer to watch the market correct itself, and always have a balanced budget where the government must spend only savings.


Right, but your preferences aren't based on any sort of understanding of economics, just on naked ideology.

And your understanding of economics is based on continually failing central planning. Not once has the Keynesian system worked. Not once.

The price on T-bills is set by auction, and I'm not so sure it'd be a wise idea to put a thumb on the scale with them. If we systematically undervalued them, then people who (randomly?) got them for less than others were willing to pay would just sell them to the people willing to pay more.


What does that have to do with anything in this thread? I'm not suggesting selling T-bills for less than they're worth. I'm suggesting selling less of them.

>> ^jwray:

Ideally T-Bill interest rates shouldn't even be as much as inflation. You should actually have to make an informed choice and take a risk to make money, rather than participating in an ever-snowballing hereditary aristocracy.


@jwray, I was responding to that. Maybe I just take it for granted that you can't really get T-bills to reliably be below inflation, since the US also offers inflation-protected securities (TIPS), which means you're never going to see traditional treasuries have an interest rate lower than that of TIPS + expected inflation.

I also pointed out that T-bills and longer-term US government bonds aren't the only safe investment out there.

Don't get me wrong, I'm all for your idea of raising taxes to balance the budget, I just think trying to eliminate the deficit during a recession would be counterproductive. It wouldn't encourage more lending, it would discourage it.

They're not the only safe investment out there, but they're the safest investment. Also, the interest rates on T-Bills are already less than the rate of inflation, except for really long term ones >5yr.

@jwray, you're right. I'm mixing T-bills with longer term bonds. But that kinda just reinforces my overall point -- the return on T-bills is already below inflation, and we're still seeing a dearth of private investment. Fed Funds rate is similarly low as well.

If they got much lower (negative return, say) or went away, people banks would stuff their mattresses reserves with cash, and that's no good either.

An expectation of inflation might help prevent that, but it seems that even a near 0% fed rate isn't doing the job.