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Mar 27, 2004 Should the federal government follow a policy of allowing its debt to grow, or should it follow a policy of paying off its debt? That question is hotly debated, particularly in a presidential year when opposing viewpoints stand out the most. From the time he took office, Bill Clinton took aim at the deficit, making a pledge to pay it off. He was convinced this was the right course after discussions with his financial policy advisors, of whom Robert Rubin and Lloyd Bentsen were chief. Clinton succeeded in paring the debt down, driving it to a minimal level and some have credited that policy as a contributing factor to the economic boom of the late 90’s. Others sharply disagree. In a recent Wall Street Journal article, Wayne Angell, a member of the Federal Reserve in the mid 80’s to 90’s, states that the recession that came about in the third quarter of 2000 was due to the Clinton administration’s preoccupation with eliminating the federal debt. The primary issue was the high tax rates that the Clinton administration set. At the other end of the spectrum is the supply side ideal held by the Bush administration, which doesn’t view having a substantial federal deficit as a major problem. The Bush administration has gone the opposite of the previous administration and cut taxes, while allowing the deficit to grow. Will this strategy pan out? Time will tell. Rubin doesn’t think so, and eloquently states his view on the process in his recently released book, “In An Uncertain World.” Rubin largely opposed the Bush Administration tax cuts (he writes that the should have been better targeted and temporary), and wanted to see the federal deficit stay low. His approach to the federal deficit has largely been accepted by the Democrats, and dubbed “Rubinomics.” Angell says that Rubin has it all backwards, however. Angell writes that “the pay down the federal debt advocates, led by Mr. Rubin, apparently did not understand in 1996 and do not understand in 2004 the first principle of macroeconomics – output growth is not sustainable without growth of total credit and debt.” An analogy from the stock market is that the pay-down advocates are only looking at the stock side of a stock and debt valuation process when the value of debt must also be factored into the valuation equation. Angell goes on to discuss how the rapid paydown of the federal debt slows down the gross domestic product (GDP) growth. In turn, this causes a slowdown of tax receipts. Angell does indicate his concern is more with the growth of government spending. Why? He points out that federal spending diverts labor and capital away from private capital goods production. Which viewpoint is correct on the federal deficit? Should it be pared down to a small amount? Or should it be allowed to grow along with the economy/GDP? Perhaps the answer is not found in choosing one or the other of the two viewpoints. Perhaps the answer is not static or final. Maybe the answer is situational, and our political system, which allows changes of administration and their budgetary viewpoints, serves us well. It allows for contraction and expansion of the federal deficit over cycles of time to meet the specific needs of an era. Although the cycles are basically random in nature (who knows whether a Democrat or Republic will be selected to any specific term, and what their financial viewpoints are – or whether they control enough legislative votes to make something happen?) they seem to serve the public relatively well in regulation of the economy. On the flip side, however, is that by the time data shows what is going on the next administration is often in office. If Mr. Angell is correct and Clinton’s reduction of the deficit was responsible for the recession of 2000, it was already too late to do anything about it by the time it was recognizable in the actual figures. If the results of an administration’s financial/economic policy is only seen several years down the road, then the incoming administration must be more reactive than proactive. Over time, however, the effects of different economic policies will become more readily apparent. It will be very interesting to see how the results from the Bush administration’s policies compare to not only the Clinton Administration’s run, but also the Regan administration’s term in office. Perhaps sometime in the future an ideal economic policy approach will become apparent – and it may turn out to be rotational interplay between paying down the debt and letting the debt grow. ------------ About the author: Dwayne Hines currently has 12 books selling in major bookstores and writes for major magazines such as Physical and FitnessRX. Email Dwayne Hines: dhines@3dinet.com Tell a friend about this site! ------------ |
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