Should the federal government worry about its debt or deficits?

[August1991]

Consider this simple example (for which I will use the arbitrary annual interest rate of 10% since then money doubles in 7 years):

Situation A

You have $10,000 in the bank.

Stephen Harper taxes you $1000 and blows the money on a stealth jet fighter.

You now have $9,000 which you save at 10%.

In 7 years, at 10% interest, you have $18,000.

Situation B

You have $10,000 in the bank.

Stephen Harper borrows $1000 from the German bond market (at 10%) and blows the money on a stealth fighter.

You save your $10,000 at 10% interest and in 7 years, you have $20,000.

In 7 years, Stephen Harper taxes you $2,000 to pay back the German bond holders.

After this tax, you have $18,000.

----

Situation A and Situation B lead to the exact same result. IOW, it makes no difference whether Stephen Harper borrows the money to buy the planes or he taxes us now to buy them.

(If you don't find my 10% interest rate realistic, choose any rate you want. You'll get the same result. If you're worried about taxes on the interest income, imagine that the initial $10,000 is in a TFSA. If you think that you might die in the next 7 years, then imagine that your kids will get the money/tax liability.)

If anything, Stephen Harper probably borrows at a lower interest rate in the German bond markets than you or I can easily receive on relatively safe investments which would suggest that Situation B is better than Situation A.

-----

When Harper and Flaherty say that they're going to eliminate the deficit by 2015, I generally don't listen to them because I just don't care. They can eliminate it next year, or in 2025 or never. It'll make no difference to me. The talk of deficit and debt is just propaganda for people who don't understand basic economics.

OTOH, I do pay attention when Harper talks about spending $1000 (on a per capita basis) on jet fighters. I particularly pay attention when Harper says that he's going to cut federal government spending. I'll believe when I see it.

Edited May 15, 2011 by August1991

[Smallc]

When Harper and Flaherty say that they're going to eliminate the deficit by 2015, I generally don't listen to them because I just don't care.

Then you aren't thinking (I'm being generous). Debt and deficit affects you directly. If you don't believe that, just look at Greece, Ireland, or Portugal.

[dre]

Consider this simple example (for which I will use the arbitrary annual interest rate of 10% since then money doubles in 7 years):

Situation A

You have $10,000 in the bank.

Stephen Harper taxes you $1000 and blows the money on a stealth jet fighter.

You now have $9,000 which you save at 10%.

In 7 years, at 10% interest, you have $18,000.

Situation B

You have $10,000 in the bank.

Stephen Harper borrows $1000 from the German bond market (at 10%) and blows the money on a stealth fighter.

You save your $10,000 at 10% interest and in 7 years, you have $20,000.

In 7 years, Stephen Harper taxes you $2,000 to pay back the German bond holders.

After this tax, you have $18,000.

----

Situation A and Situation B lead to the exact same result. IOW, it makes no difference whether Stephen Harper borrows the money to buy the planes or he taxes us now to buy them.

If you don't find my 10% interest rate realistic, choose any rate you want. You'll get the same result. If you're worried about taxes on the interest income, imagine that the initial $10,000 is in a TFSA. If you think that you might die in the next 7 years, then imagine that your kids will get the money/tax liability.

If anything, Stephen Harper probably borrows at a lower interest rate in the German bond markets than you or I can easily receive on relatively safe investments which would suggest that Situation B is better than Situation A.

-----

When Harper and Flaherty say that they're going to eliminate the deficit by 2015, I generally don't listen to them because I just don't care. They can eliminate it next year, or in 2025 or never. It'll make no difference to me. The talk of deficit and debt is just propaganda for people who don't understand basic economics.

OTOH, I do pay attention when Harper talks about spending $1000 (on a per capita basis) on jet fighters. I particularly pay attention when Harper says that he's going to cut federal government spending. I'll believe when I see it.

No offence but you dont even VAGUELY understand this topic.

The government faces literally the same set of hurdles with defecit financing as you would if you ran your own finances that way. I dare you to try it... increase your spending without increasing real revenues, and then make up the difference with credit. If you do it for too long you will get to a point where youre annual revenue wont even cover the interest on legacy debt. Not only do you pay way more for items than if you paid "out of pocket", but if you get on the wrong side of the revenue/debt curve it can be mathematically impossible to recover.

This happens to real people all the time, and it happens to businesses and nation states too.

Lets say we defecit finance those fighter jets, and dont pay that debt back down in a few years. You will literally just keep paying interest forever without the ammount you owe coming down the ammount you owe may even INCREASE over that time despite all your interest payments. By the time these fighter jets have rusted into the ground you may actually even owe MORE for them than you did the day after you bought them even though youve already made more in interest payments than the origional purchase price. And even if government is responsible and pays those debts back down over the next 20 years they will still end up paying way more than the sticker price. If you just buy what you can afford then this can never happen to you.

When Harper and Flaherty say that they're going to eliminate the deficit by 2015, I generally don't listen to them because I just don't care. They can eliminate it next year, or in 2025 or never. It'll make no difference to me.

It could make a huge diference to you. It could impact whether or not you have a job, how much stuff you can afford to buy, and how much goods and services cost.

Edited May 15, 2011 by dre

[August1991]

Then you aren't thinking (I'm being generous). Debt and deficit affects you directly. If you don't believe that, just look at Greece, Ireland, or Portugal.

Smallc, as long as I have $10,000 in the bank, what difference does it make whether Harper taxes me now or in 7 years?

In teh case of the countries you mention, they all have residents with more than enough to pay the taxes and debt. Indeed, the private wealth of these residents is rising as fast as the public debt.

IOW, this is a political play to get someone else to pay the money - and a play to cut government spending.

----

Smallc, go back and consider my simple A/B example above. I trust basic arithmetic when issues seem complicated.

[August1991]

The government faces literally the same set of hurdles with defecit financing as you would if you ran your own finances that way. I dare you to try it...

Dre, you and I are not at all like the government.

Stephen Harper can tax you or me or anyone else in Canada at any time he wants. You and I can't do that.

This simple fact changes entirely the whole perspective of debt and deficits.

----

As I say to Smallc, go back to my simple example above and tell me what is wrong.

[Smallc]

Smallc, as long as I have $10,000 in the bank, what difference does it make whether Harper taxes me now or in 7 years?

You think that if the government pays interest on an amont of money for 7 years, that isn't going to affect how much they have to tax you? Really? You'll be paying more in 7 years than you'd be paying now.

In teh case of the countries you mention, they all have residents with more than enough to pay the taxes and debt. Indeed, the private wealth of these residents is rising as fast as the public debt.

No it isn't. I challenge you to prove that.

Smallc, go back and consider my simple A/B example above. I trust basic arithmetic when issues seem complicated.

Except that your simple math is wrong.

Edited May 15, 2011 by Smallc

[August1991]

You think that if the government pays interest on an amont of money for 7 years, that isn't going to affect how much they have to tax you? Really? You'll be paying more in 7 years than you'd be paying now.

The example takes interest explicitly into account. Indeed, I erred on the side of caution and overstated the likely government interest rate compared to a private rate.

Except that your simple math is wrong.

Where is the error? Edited May 15, 2011 by August1991

[Smallc]

The example takes interest explicitly into account. Indeed, I erred on the side of caution and overstated the likely government interest rate compared to a private rate.

You shouldn't come out to the same amount. You're math is fuzzy and very suspect. If the government pays $1000 now instead of $2000 later, that's $1000 that the government doesn't have to pay, and so that's $1000 that you don't have to pay.

[RNG]

It was in the '80's, I think, before computers anyway when we all either sat with paper and pencil, or went to H&R Block to get our tax return done. Remember when they used to send a "guide" with your return documents. Depending on what the 1991 means, you may be too young. Anyway, one time they had on the front page a pie graph. And it showed that 25% of your tax dollars were being used to service Canada's debt.

Does that not cause you some pause?

So if we got rid of that, either and the best case in my opinion, they could reduce our taxes by 25%. Or even by the lefties desires, they could provide 25% more gimmies to the unwashed. And either one is better.

[dre]

Even in a pretty rosy scenario...

Lets say we borrow 20 billion dollars today, and then the government somehow manages to eliminate the defecit completely in the next year, and we run a balanced budget for 1000 consecutive years. At the end of that thousand years you will still owe exactly 20 billion dollars for those planes, even though you have already paid the purchase price many times over in interest payments.

The only way knock that principle down is to run budget surpluses. Eliminating the defecit wont do anything to your existing balance sheet at all it will just stop it from getting even worse next year.

[RNG]

I have worked with a lot of "professionals". Well educated persons. Engineers, scientist, and so on. With an emphasis on technical.

But it amazed me and still does, the number of people who don't understand the difference between deficit and debt. They say "So we have a 40 billion dollar deficit, no big deal, there are 35 mil of us, so it's only $1,142/person. But that's just for this year. Dummies.

[dre]

Dre, you and I are not at all like the government.

Stephen Harper can tax you or me or anyone else in Canada at any time he wants. You and I can't do that.

This simple fact changes entirely the whole perspective of debt and deficits.

----

As I say to Smallc, go back to my simple example above and tell me what is wrong.

Stephen Harper can tax you or me or anyone else in Canada at any time he wants. You and I can't do that.

This simple fact changes entirely the whole perspective of debt and deficits.

This is where you are completely wrong. Governments cannot just arbitrarily adjust their revenues. If you tax too much then youll damage the economy and your revenues will actually go down. And in a democracy tax hikes get parties turfed out of office so in many cases they arent politically possible, and it depends on the economy and other circumstances.

Neither the government or a business, or a private citizen can arbitrarily increase revenues. Sometimes tax increases raise government revenues over a given timeframe, sometimes they dont. And sometimes tax CUTS actually increase government revenue as well.

A government doesnt know if it will be able to increase renevues to pay back the loan or not. For all they know revenues could collapse. If they borrow against these potential revenue increases then its really no different than me saying... No problem! Ill increase my debt to get stuff now, and then Ill just INCREASE MY INCOME later to pay for it Maybe it will work and Ill get a raise... but maybe it wont.

Dre, you and I are not at all like the government.

Like I said... in this context we face the EXACT same hurdles.

[August1991]

You shouldn't come out to the same amount. You're math is fuzzy and very suspect. If the government pays $1000 now instead of $2000 later, that's $1000 that the government doesn't have to pay, and so that's $1000 that you don't have to pay.

Why not? To simplify, I assumed a 10% annual rate (so that money doubles in 7 years). I used the same interest rate for government bonds as for a personal investment. (In fact, the government borrows at lower interest rates than I receive on my investments but I'll ignore that difference.)

And it showed that 25% of your tax dollars were being used to service Canada's debt.

Does that not cause you some pause?

Not at all. If the government takes money from me, that's money that I can't save and can't invest.

----

RNG and Smallc, you are missing sight of two critical assumptions, and the important conclusion of my example above. The first assumption is that I have $10,000 and that I intend to save it. The second assumption is that Harper is wisely buying a fighter jet. The conclusion is that how he pays for the jet doesn't matter.

Take these ideas into the real world of politics.

Edited May 15, 2011 by August1991

[Smallc]

Why not? To simplify, I assumed a 10% annual rate (so that money doubles in 7 years). I used the same interest rate for government bonds as for a personal investment. (In fact, the government borrows at lower interest rates than I receive on my investments but I'll ignore that difference.)

I'm not sure you're thinking this through.

[August1991]

Governments cannot just arbitrarily adjust their revenues.

Of course they can, and they do.

If you tax too much then youll damage the economy and your revenues will actually go down.

Now you're changing your argument. If anything, you are suggesting that Harper would be wiser to pay for the jets using borrowed money since, according to you, "taxes damage the economy".

I'm not sure you're thinking this through.

What am I missing? Edited May 15, 2011 by August1991

[Smallc]

Of course they can, and they do.

And I'm not sure you understand what dre was saying. They can easily adjust their methods of revenue collection. That doesn't guarantee them an increase in actual revenue.

[Smallc]

What am I missing?

Money. If the government runs a deficit, and has to pay for it, you're missing money.

[dre]

I have worked with a lot of "professionals". Well educated persons. Engineers, scientist, and so on. With an emphasis on technical.

But it amazed me and still does, the number of people who don't understand the difference between deficit and debt. They say "So we have a 40 billion dollar deficit, no big deal, there are 35 mil of us, so it's only $1,142/person. But that's just for this year. Dummies.

Thats what people dont get. The defecit is just the ammount we will add to the debt in this one year. It underscores the sheer magnitude of the contracts western countries have actually been signing with all this borrowing.

Take the US for example. They are 14 trillion dollars in debt and have only ran a balanced budget for a small handfull of years in the last 50. Now lets say that the US government suddenly adopted a conservative, "pay as you go" fiscal policy, and they started running 50 billion dollar SURPLUSES... (this is INSANELY over omptimistic)... They would have to run those surpluses for more than 280 years before that debt was paid down.

[August1991]

But it amazed me and still does, the number of people who don't understand the difference between deficit and debt. They say "So we have a 40 billion dollar deficit, no big deal, there are 35 mil of us, so it's only $1,142/person. But that's just for this year. Dummies.

But $1142 more in my pocket is more money to pay down my mortgage (and in effect save).

As long as Canada as a whole has a positive net wealth (and it does as well as Greece and Portugal), who cares how the federal government pays for its spending?

And I'm not sure you understand what dre was saying. They can easily adjust their methods of revenue collection. That doesn't guarantee them an increase in actual revenue.

I think that it's fair to say that the federal government is on the side of the Laffer Curve with the positive slope. IOW, if it raised (for example) the gasoline excise tax to 15 cents per litre, it would increase government tax revenues. Edited May 15, 2011 by August1991

[August1991]

Thats what people dont get. The defecit is just the ammount we will add to the debt in this one year. It underscores the sheer magnitude of the contracts western countries have actually been signing with all this borrowing.

But you ignore the ability of western economies to generate tax revenues.

----

Guys, don't lose sight of the point in my OP. How Stephen Harper pays for the stealth fighters doesn't matter: deficit-finance or a pay-as-you-go tax with balanced budget are the same thing.

The big question is whether we need stealth fighters, or multicultural festivals in St-Normandin-du-Cap.

Edited May 15, 2011 by August1991

[dre]

Of course they can, and they do.

Now you're changing your argument. If anything, you are suggesting that Harper would be wiser to pay for the jets using borrowed money since, according to you, "taxes damage the economy".

What am I missing?

Now you're changing your argument. If anything, you are suggesting that Harper would be wiser to pay for the jets using borrowed money since, according to you, "taxes damage the economy".

Im not making a value judegement about the jets at all. Not all defecit financing is bad... it depends on how it effects your bottom line over the long term or whether you spend that money on things that offer a return on that investment. Its hard to quanity the ROE for defense expenditures, and its usually not very good.

If the government used my philosophy then they would probably shop for planes the same way I shopped for my last truck. I didnt buy the most expensive truck on the market because I was already deep in debt and I wanted to stay on the managable side of the debt maintenace equation. So I made a fairly modest purchase that satisfied my immediate needs and Ill upgrade later IF I can afford it. But theres already a whole bunch of threads where the planes have been beat to death.

Whats at issue here is your belief that you can just ignore your balance sheet, and bleed red ink, based on the blind hope youre revenues will increase later.

[dre]

But you ignore the ability of western economies to generate tax revenues.

No im not ignoring that at all. Not in the slightest. We know exactly how much tax revenue western countries have collected, and we also know that in most cases it has not even been enough to pay the governments operating expenses and the INTEREST on the national debt. Very few of these countries have been able to chip away at the principle at all.

[kimmy]

If the government of today is scared to ask me for $1000, how likely is it that the government of 7 years from now is going to have the courage to ask for $2000? They won't. They'll borrow that too, and a few years later they'll be stuck wondering whether to ask for $3000, or borrow that as well.

As well, there is the question of who actually ends up paying. Many of those who might be asked for $1000 today will retire and will be net recipients of government money in 7 years. Many of those who might be asked for $2000 in 7 years don't have their $10000 in the bank accumulating interest yet.

-k

[RNG]

Why not? To simplify, I assumed a 10% annual rate (so that money doubles in 7 years). I used the same interest rate for government bonds as for a personal investment. (In fact, the government borrows at lower interest rates than I receive on my investments but I'll ignore that difference.)

Not at all. If the government takes money from me, that's money that I can't save and can't invest.

----

RNG and Smallc, you are missing sight of two critical assumptions, and the important conclusion of my example above. The first assumption is that I have $10,000 and that I intend to save it. The second assumption is that Harper is wisely buying a fighter jet. The conclusion is that how he pays for the jet doesn't matter.

Take these ideas into the real world of politics.

That is totally wrong. These are real debts. At some point in time, they either need to be paid off, or we default. And think about that. You didn't initially come across to me as the typical dingbat socialist. Debt is good, what me worry? Get a grip.

Greece, Portugal, Spain and Ireland are in deep shit. Their citizens will be paying taxes up the stump with little return for a long time. Your and Happy Jack's policies will just push Canada into the same situation.

Or was I just trolled?

[dre]

If the government of today is scared to ask me for $1000, how likely is it that the government of 7 years from now is going to have the courage to ask for $2000? They won't. They'll borrow that too, and a few years later they'll be stuck wondering whether to ask for $3000, or borrow that as well.

As well, there is the question of who actually ends up paying. Many of those who might be asked for $1000 today will retire and will be net recipients of government money in 7 years. Many of those who might be asked for $2000 in 7 years don't have their $10000 in the bank accumulating interest yet.

-k

If the government of today is scared to ask me for $1000, how likely is it that the government of 7 years from now is going to have the courage to ask for $2000? They won't. They'll borrow that too, and a few years later they'll be stuck wondering whether to ask for $3000, or borrow that as well.

Yup.

As well, there is the question of who actually ends up paying.

Thats an excellent point because a lot of this debt could end up being passed on to people that are not even alive today, and much of it almost certainly will.

Back to his fighter jets example... Lets say that the Government borrowed 30 billion dollars today, and then somehow manages to balance the budget the very next year, and then runs a string of 50 straight balanced budgets. That means that the people who are around in 50 years will be stuck paying for every single penny of this purchase, and we will merely have made interest payments that stop the principle from growing.