Borrowing to build physical and human capital is a way to finance growth. Can you imagine the quality of education and the number of college educated people if there were no student loans? Can you imagine the house you could get without a mortgage? They would not be nearly so nice as if you get a generous loan at a low interest rate. The same is true of our nation's capital investments. Can someone tell me if we are carrying on our books assets such as the following: the nation’s bridges, parks, federal buildings, military bases, roads and internet?

We certainly are not accounting for our children’s education via a standard statistical model that predicts the likelihood that they will stay in the US and booking their future increased tax revenues on their human capital as an asset.

Strategy

The goal for our national debt should be around 80-90% “loan to value” to borrow a phrase from the housing sector. We should finance 10-20% of spending out of current consumption as a down payment and finance the rest out of borrowing.

If we open the money spigot from borrowing, we can reduce taxes and still be able to afford some wondrous projects. Here are a few grand challenges for the US government to undertake:

Buy out existing terrestrial TV spectrum users, pay for “Rural Cable-fication” or subsidize rural satellite service and use the spectrum for power broadcast or mobile data.

We should undertake grand foresighted projects like colonizing the Moon, Mars, LEO, the Lagrange Points and NEO. We should some big prizes for major longevity challenges like drugs that increase working life for folks with heart disease or cancer. More money should be allocated for local environmental improvements such as pollution permit retirement that make the US a nicer place to move to.

We are a rich nation with good credit. We should be utilizing that credit to increase our productivity, education, health, environment and all the other things that make our economy more valuable. By making the US a better place to live we will continue to attract the world’s richest and smartest people to pay our taxes and grow our economy.

Borrowing is not a zero sum game. Our children may pay $2 in taxes for every dollar we borrow now to invest, but with a reasonable return, they will be making $3 or $4 more for every dollar we invest. Another commonly misunderstood assumption is that federal investment crowds out personal investment. While somewhat true, the federal investment costs are lower due to a cheaper interest rate because as a sovereign, the government can borrow for less than a private individual or corporation can. Thus the federal government can invest more than what it crowds out. Thus, the private investor can either get an adequate savings rate by investing in government bonds that are now at a higher interest rate, or by investing in something else that becomes viable due to the flood of federal investment including subsidized private investment corporations.

I am not sure whether subsidizing all investments equally across the board is best course. This course would distort the economy least, but perhaps the benefits would not accrue to taxpayers since some of the activities subsidized would be hard to tax or would be too specialized to use if a firm goes broke. A reasonable policy alternative is differentially subsidizing investments that are easy to tax or are common and durable enough to be used by more than one owner. For example, subsidizing real estate improvements would distort the economy, but perhaps in a favorable direction.

Tactics

We should grant H-1B entry visas to everyone willing to pay an entry fee in addition to our patchwork system of “need”. Replacing our H-1B visa patchwork system would be better.

We should invest in our children’s education by Federal borrowing. We should invest in the housing st0ck with Federal borrowing. Fannie Mae and Sallie Mae type of debt should be subsidized even further. Houses, buildings, bridges and roads are good because they can be reused by lots of folks. SBA loans are good, but the government should shoot for sufficiently high returns to pay back the money.

Government management of these loans is of course a negative. I would recommend having a general subsidy that thousands of competing businesses could take on their tax filings.

My vote for subsidizing roads would be to subsidize deployment of electronic toll tags. Perhaps build them into license plates. Spending 10 minutes in a toll line wasting $2.50 worth of time at the average wage to pay a toll is inefficient. There are plenty of other opportunities for electronic and money queues to replace physical queues.

Keeping property taxes deductible would be another good choice. Allowing the deduction of the purchase of local services that the property taxes typically pay for would be a good follow up that would reduce pressure to have local and state governments provide services at all. That is, the following services would become deductible: private security, private fire protection, private schools, private hospitals, private roads, and private utilities. The net effect of this tactic would be to keep home building going strong. Expanding the capital gains tax exemption on real property would be good. The only beneficiaries of encouraging people to move whenever their house appreciates $250,000 per person is the realtors. A compromise would be to have the excess over the $500,000 real estate gain exemption be carried forward to subsequent years.

State taxes and bonds are another area to allow deduction and further subsidize. By having a federal service that buys state bonds and repackages them with a federal guarantee, the federal government can reduce the cost of state borrowing by more than the additional risk that they incur. In essence, it would be a FDIC for state bonds. Municipal bonds could be covered in the same way. Completely nationalizing bond insurance, though, would be a bad idea, but offering a federal backstop to a portion of the bond issue to all underwriters would allow them to not let borrowing get out of hand, but limit their downside risk so they can encourage state and local investment.

Another area to subsidize is education. Student loans are pretty generous already, but there are several ideas that would not distort the economy too much and would encourage human capital investment across the board. For example, making books, tuition and school supplies tax deductible (and those deferrable since students typically do not pay a lot of taxes to deduct). Giving too much money and freedom to students would potentially unduly concentrate the efficiency as the student declares bankruptcy to avoid paying. Making the debts not dischargeable is not a good solution because it hurts the economy by creating a class of people with no incentive to work. Perhaps a better way is to create an affinity program where the government would pay a portion of the tax receipts of the graduates to the universities that educated them.

Errmmmmmm.... I don't know where to begin on this one, perhaps here would be a good start...

First off, yes it is true that private borrowing to aquire capital goods is a good thing, however, the government CANNOT "just turn on the money
spigot". They can create more *dollars*, but that does not create more _value_. The result is more dollars chasing the same amount of value, resulting in each dollar being worth less value, causing prices to go up.

This is otherwise known as "inflation". This would make your "wondrous projects" more expensive. If you couldn't afford them before, you couldn't afford them after, either. TANSTAAFL.

The laws of economics, like the laws of physics they derive from, cannot be annulled by political fiat. You can *try* to dodge them, but it's like squeezing a water ballon, push it down here, it bulges out somewhere else.

Furthermore, like many other economically unwise ideas, the government is already doing it. They are already borrowing as much as they can get their hands on. The federal debt is somewhere around $7.9 Trillion, and they are adding to it at a rate of close to $700 billion per year, not including interest, which is around 4%, all this off a $2.8 Trillion per year federal income. Basically, they are borrowing money as fast as anyone will lend it to them. (The 'anyone' here being mostly foreign central banks)

This is already putting the economy in a precarious position. For example, if the Chinese de-peg their currency from the dollar, the dollar is going to drop rather severely in value. (The chinese buy US treasury bonds (that is, loan the US government money) to support the currency peg. Because the way the Federal reserve works, a drop in the demand for US t-bonds will mean a drop in demand for dollars, thus lower value of a dollar)

Gods help us if something really serious were to happen, like Fannie Mae falling over[1]. Such an event would cause a chain-reaction of defaults that could cause the entire American economy to face-plant. That would take *years* to recover from, and would probably cause a global depression.

[1] Yes this is a serious worry. Fannie Mae is leveraging $1 Trillion in loans on less than 8% of that in assets. Given the size of their portfolio, if they tank they will have a serious impact on the economy. Alas, the outlook on that does not look good, recently they admitted an $11 BILLION dollar "accounting error", roughly 20 times the amount that brought down Eneron, and more importantly, over 12% of their asset value.

Furthermore, the quality of the loans they are making has been seriously questioned. They are holding alot of loans that are a knifes edge away from default. Given that the real-estate market right now looks like the dot-com era NASDAQ, and a drop in real-estate prices is likely, this could leave Fannie Mae holding alot of defaulted loans for more money than the collateral (i.e. the house) is worth. It wouldn't take too much of that to chew through their assets, then, splat.

That's it. You keep increasing you national debt. Bankrupt your country a lot quicker than you currently are. A blessing in disguise for the rest of the world.

Yes, government bodies are such incredible engines of efficiency that they can readily return high rates of return on investments.

And such monies invested are never, ever diverted to non-investment expenses such as income redistribution or studies on the mating habits of the common European swallow.

I trust my government to spend my money more wisely than I trust myself!

Yes, there is quite a divergence between the rosy financial picture that some like to paint and the way things actually feel when you walk around and observe a little.

In Los Angeles you get the feeling that the majority of people's finances are on a knife-edge, that they are leveraged to the hilt. It's said that the average family with kids cannot afford to have anything financially unexpected happen or someone has to go without health insurance. Presuming that they have mort`gages too, it seems to me that it won't take much to collapse this credit bubble, to get them into a situation of negative equ`ity where they lose their house and are unable to pay for their car etc. Imagine in a few years driving to your local supermarket and having to pass by whole families with kids asking for money outside.

I note also that the bankruptcy laws are changing, healthcare costs rising out of control, we are obligated to finance a protracted military operation in Iraq, and on top of that oil prices may cause an economic contraction.

Excessive borrowing didn't make Argentina a great country; living beyond their means just masked the real problems and kept their government popular enough to keep winning elections until the end came. Tell me why that can't happen in the US.

(note the symbol ` appears to fool the spam blocker)

"That's it. You keep increasing you national debt. Bankrupt your country a lot quicker than you currently are. A blessing in disguise for the rest of the world."

And what blessing is that? A global economic collpase?

You obviously don't possess the mental faculities to think your 'dream' scenario through to it's final conclusion.

$8T is less than one year's GDP. If investment is put into productive assets (not by the government directly, but by private industry), then the economy can grow faster in the future. If huge fiscal stimulus leads to inflation, then spending can hurt more in terms of exacerbating inflation than helping. But with factory capacity well below an inflationary zone, it makes sense to invest.

Education is already divorced from supply and demand because of the heavy subsidy and first degree price discrimination. Many schools can accommodate additional students with distance learning. The main source of inflation from more investment in human capital would be that the students would take time off from the rest of the economy which would translate into a little wage pressure.

$8T is simply not a lot of money if the federal portion of the economy is appraised at $100T. We should do a fair appraisal and then work on the cost benefits of slightly higher inflation and higher debt versus the social return of additional investment.

Some of my proposals for increasing federal debt do not entail any additional direct federal spending and if tailored carefully may reduce total federal+state+municipal debt load. I.e., an FDIC for state bond investors could potentially lower interest costs for states by more than they raise them for the federal government.

That is, I agree there may be strong reasons not to spend more, but the debt is not one of them.

Hey M. Dragon,

There are no "laws of economics" as there are in physics. Economic growth is an abstraction. Money is an abstraction. The abstraction is real as long as the various actors and institutions in a society, collectively, believe it's real.

Sam is not so wrong in his analysis if everyone believes that such borrowing and spending is good then it probably will be good. If the Misien's break everyone's faith in such a system then it will probably fail.

The problem with Misiens is that they love the logic that passes as "libertarian economic thought" but they hate the reality that is economic history. If you look at any wealthy civilization, as far back as the Egyptians and the Babylonians; government taxation and spending drove economic growth and development. Every civilizational collapse, along with the wealth that attended it always collapsed after a breakdown in the central governing structure and, more significantly, a breakdown in the belief system in that structure.

I challenge you to name one civilization that ever rose and produced wealth without significant government spending and direction. Please stick to the historical record and don't quote me any Mises. I have "Human Action", "The Theory of Money and Credit", and "On Liberty" on my bookshelf. I'll check for context.

You forget, Dragon, that most people are sheep and want to be herded. Most people don't want to make their own choices. Most people want someone else to do the thinking for them. Most importantly, most people need to believe that there is some entity out there maintaining order and keeping the wolves at bay.

"I challenge you to name one civilization that ever rose and produced wealth without significant government spending and direction. Please stick to the historical record and don't quote me any Mises."

The United States of America, 1776-1900.

Great Britain, same period.

(Assming by "significant" you mean "on the order of what we have now in the Western world")

"Every civilizational collapse, along with the wealth that attended it always collapsed after a breakdown in the central governing structure and, more significantly, a breakdown in the belief system in that structure. "

The Roman collapse was brought on by hundreds of years of tax increases, currency debasements, and increasing economic regulation, culminating in laws forbidding people from changing their socioeconomic position. This, of course, led to a breakdown in the belief system in that structure, as the Roman government became more and more undeniably the enemy of the people rather than their protector.

I disagree with the your assessment of the early USA and the the UK.

The first half of US history, 1600-1780, was subsidized by the British Crown. The period you name was a period of heavy federal subsidy, in the form of federal land giveaways to settlers and railroad companies and the subsidization of canals in the east. The military should also be considered a subsidy to settlers and the railroads since a military was mostly unneeded for any reason, civil war excepted, except to protect the settlers and railroads.

Britain was very much a state controlled economy during the same period. The Crown and Parliament actively fostered industrial development on the home island. In the colonies, they limited industrialization and maximized raw material production. They then forced those same colonies to buy the British manufactured goods.

The state led the way in both cases.