Question to anybody that knows about economics

[Grendal]

I keep reading about how much the war is costing America, and the rebuilding of Iraq could top what? $600 billion? And now war ships off Africa, and now ties with alkiada (whatever) and Iran (new war?). Plus whatever they are spending in Afghanistan, plus whatever they spend at home and all the rest of it. My question to anyone in the know....How much spending can one country do before they have a total and complete economic collapse? What are the chances of the US becoming another USSR?

[Animal]

It's called deficit spending, in essence spending money that doesn't exist.

Keynesian economics tells us that running a deficit during times of a recession is actually a good thing. The problems of deficit spending out of a recession even out through two negative possibilities, inflation and crowding out. Inflation means there is more demand or money than there are goods this causes an increase in prices and drives down the worth of the dollar. This depreciation of the dollar counters the cost of the deficit but destroys the purchasing power of the dollar. A five dollar debt is still a five dollar debt even if the five dollars are only worth what used to be a five cent piece of bubblegum. Despite its dangers inflation is used to some extent to curb the debt. Crowding out is when the government is looking for the same capital that the business sector wants to invest. This causes fierce competition for funds to invest. The fierce competition causes an increase in interest rates and often business will decide against further investment and growth. The governments needs will “crowd out” business needs. This turns potential assets into waste.

However, there is a third option which would allow the government to run a deficit and avoid the negative aspects of inflation and crowding out. Borrowing from foreign sources is a tangible and recently very common practice. Attracted by high interest rates and stability, foreigners now buy huge amounts of U.S. national debt. Of course this cannot be the perfect solution otherwise no one would be concerned about the debt. The problem with borrowing from external sources is the lack of control the government has over foreign currency and debts. Internal debts can be paid with increased taxes, inflation, and other monetary controls the government has but external debts can extremely damaging to a country if it cannot buy enough of the foreign currency to pay the interest.

Running a deficit is apparently good for an economy that is operating inside its production possibilities curve but it can be damaging to an economy operating on the curve. A deficit managed properly has the effect of increasing demands. An economy inside its curve can increase supplies in reaction. An economy on the curve can increase demand but its supplies cannot increase causing prices to rise, or inflation. If there is no deficit and the curve shifts to the right then supplies will not increase and the country will no longer be operating on the curve. A deficit must be maintained to insure that the economy grows with its resources.

So is this good or bad? Well, the rebuilding of Iraq is more than likely going to create jobs for US companies, leading to an increase in disposable income for US citizens who undoubtedly will spend their hard earned money...you guessed it in the US. The trick is to know where to draw the line.

[ 08-12-2003, 06:50 PM: Message edited by: Animal ]

[Timber Loftis]

An important thing to remember is that in modern parlance "Keynesian Economics" = deficet spending. However, Keynes only advocating such spending in times of recession, and in fact advocating tightening the belt and increasing taxes to move the money back in and pay off the debt during times of prosperity. Since Keynesian deficet spending was introduced in the 1930s, however, no administration, no Congress, has been able to make itself do this. Adopting 1/2 of Keynes philosophy without the other 1/2 is disastrous is the long run. When Keynes stood up and stormed out of Congress while everyone was filibustering about the "long run," Keynes quote was "In the long run, we're all dead." Well, Mr. Keynes, due to every politicians perversion of your ideas since then, we certainly will all be dead. Thanks a frikkin lot.

Problem is simple. The deficet spending credit card is a perk today's politicians can't resist using to dole out neo-nepotistic favors and pander to special interest groups. E.g.: contracts to rebuild Iraq, a prime example. While they all know (or did in the past) that you can't keep up such economic practices indefinately, each and every one of them would prefer to use them just a little bit longer -- perhaps until just after the next election. And the next, of course.

For this reason, this damnable irresponsibility regarding Keynesian economics, coupled with the near-socialistic takeover of certain countries by big government in the 60s (good examples are England and the US), I find myself these days more aligning with Hayek's economics, especially as espoused and used to cut government by US and UK leaders in the 80s.

Oh, and don't miss the neo-Keynes/socialism tie-in. When the government is spending such large amounts of money to "boost" the economy, it is also acquiring large hunks of what were once privately-held businesses. Fixing the woes of such government ownership was acutely painful during de-regulation, beginning with the airlines in the 70s and continuing to this day, and we don't want to revert back to government ownership and have to do it all over again.

[ 08-12-2003, 07:11 PM: Message edited by: Timber Loftis ]

[Animal]

The problem with Keynesian economics is not the doctrine, but the human element involved in it.

Deficit spending during a productive economy is bad news, but politicians just aren't willing to increase taxes, or cut government spending, so the only alternative is foreign investment. Up to a certain point, foreign investment works well, but as Keynes pointed out, control over the investors currency is limited.

Keynesian economics is very socialistic in nature, probably one of the reasons why it doesn't quite work as well as it does on paper.

[Timber Loftis]

Exactly. It relies on the same men you gave the blank checkbook to turn around and exact unpopular taxing and "rainy day" saving during prosperity.

Unfortunately, there are two political camps: pro government spending, and con. Keynes demands that the same leader spend to boost the economy during one moment, then turn around and tax to get it all back the next moment. People just don't work that way.

But I would.

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[Skunk]

So is this good or bad? Well, the rebuilding of Iraq is more than likely going to create jobs for US companies, leading to an increase in disposable income for US citizens who undoubtedly will spend their hard earned money...you guessed it in the US. The trick is to know where to draw the line.

Yes but will it match the outgoing expenditure and will those companies retain and invest that wealth in the soley in the US? - I think not. And judging by the flurry of diplomatic activity of the past couple of months, neither does the Bush administration.

It's currently courting a whole host of countries to assist in the Iraq military operation and has also approached both NATO (with nominal success) and the UN - which has yet to authorise military assistance. Furthermore, those countries that have lent troops are demanding a piece of the reconstruction pie - which is going to dilute the 'reconstruction income' yet further...(and no doubt a taste of things to come in the UN).

Furthermore, there is no reason to suggest that a future Iraqi government will favour US companies to continue reconstruction if companies from other countries can do things cheaper/better.