Thursday, December 2, 2010

My letter to Tom Coburn

I am still working hard to understand economic issues. I will make mistakes in my discussion of these issues, but I hope that others can help me to fix them!

I am very concerned that the current debate over the deficit and debt of the US government is mired in premises that are not true. Premises like "we can go broke". But we can't. We pay for everything right now with money printed out of nothing. Then we tax or sell bonds to drain liquidity from the system in order to control demand (spending) and therefore inflation. People are afraid of interest rates going through the roof on Treasury securities if our debt gets too high, but the Fed can control rates and even if rates were super high, that would increase money into our system and act as a huge fiscal stimulus. GDP would rise, tax revenues would increase, and the debt would stop looking so scary. And there are many tools at the government's disposal to squelch inflation caused by too much demand - namely taxation!

Anyway, this is a short attempt at a letter from the father of a one month old. That is my excuse if it doesn't read well, or if there are legitimate errors that I need to fix!

Mr. Coburn,

I was disturbed to hear your comments on deficit reduction today. I believe that your fears of government deficits may be based on an ignorance of macroeconomic issues.

Government deficits cause the economy to expand. In fact, it is the only way to get a net gain in financial assets into the private sector. And without private credit working properly, deficit spending is the only choice to keep demand where it needs to be. And it is NOT where it needs to be, which should be obvious since the unemployment rate is so high. Our economy is not operating at full production.

A lack of real productivity now is the actual, irresponsible legacy we are in danger of leaving our children. Your statements suggest that you are more concerned with an accounting artifact than with facts on the ground.

You are mistaking the servant (money), for the master (the actual goods and services they represent). The US will always be able to meet its financial obligations if they are in US dollars. Our debt certainly is, since it is simply funds that have been deposited in U.S. Treasuries for safe-keeping.

I pray that you will research these issues more thoroughly. They are difficult, as on the surface they run counter to our "common sense" about such things. Deficits actually fuel savings. Loans create deposits. Surpluses funnel revenue out of our system! This is not what we need right now in an economy that is desperate for more demand, more money, more spending. The only relevant danger in deficit spending is inflation, but that's the purpose that taxation serves - to drain the economy of excess liquidity. Taxation is not actually a revenue source! It's a way to control aggregate demand - to cool down an overheated economy. We can drain the economy of excess demand (purchasing power) if need be.

Thanks for your efforts on behalf of the people of Oklahoma.

sincerely, Steven Stark

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