Based on academic studies of the Government Debt (much of this below is based on a 1998 white paper from the Federal Reserve on the subject), economists and scholars have determined:
(1) that each dollar of debt reduces net output by about six cents each year and taxes needed to service the debt add about another one cent per dollar of debt (http://www.federalreserve.gov/)
My comment: Based on a $12 trillion projected debt and a $14 trillion GDP then about $750 billion dollars may not be an unreasonable amount for the 2009 stimulus package in the scope of this economic disaster.
(2) if the interest rate is less than growth rate of the economy, then government debt will increase more slowly than the economy (over long time periods, then, the debt becomes less and less expensive)
My comment: What is often misunderstood is that the government is not like people's households with limited lives. The government, potentially, could be considered to have a life "in perpetuity". This means that there may be a possibility of rolling over the debt forever. It does sound like a "Madoff/Ponzi" scheme but...
(3) A government Ponzi scheme, like the "asset bubbles" studied by Tirole (1985), is both
feasible and desirable in such an economy because it helps ameliorate the problem of oversaving.
My comment: Although the U.S. has had a negative savings rate this does not include the investments in retirement plans and, if included, would change the savings rate.
Regardless, the concept that the government debt may be somewhat unlike household debt because of this ability to span many generations is quite interesting to ponder.
The interest on the debt must be paid by the Government but it is paid, in part, to U.S. citizens who hold U.S. Treasury Bonds as investments. The interest has hovered in the 12-18% range of the Government Budget and that is not much different than most household incomes. How much is your interest expense as compared to your income?
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.