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President Ronald Reagan's Great Insight
Very High Debt/Deficit Proposal
Financing Government: 2000-2100
Graph of the Proposal:
Two Highways to Economic Utopia
The government has two ways to finance its operations. One is
to tax, and many ways of taxing have been invented. The other
is to borrow; and borrowing financed the U.S. participation in
World War II. Reagan's "supply-side" economics was a peace-
time use of borrowing to boost the economy.
What are the relative merits of the two methods? There are many
who will tell us that borrowing is sinful in principle and especially
because it "places a burden on future generations." There are
others who will tell us that both reasons are ideological, having
no basis in fact.
The graph shown here displays an extreme case. The study of
such an extreme may cast light on the mystery. This idea
was stimulated by a proposal by Swedish non-academic
economist, Per Gunnar Berglund, who has solicited comment
on its feasibility. The feasibility appears to depend on the
ability to manage the financing and -- perhaps -- the
inflationary tendency it might produce.
The key parameters are shown on the graph. (They may be easily
changed on the Excel sheet by anyone interested.)
- The government continues to spend 22% of the GDP.
- The population grows at 0.85% -- to 645 million in 2100.
- The deficit is 20% of the GDP.
- The interest rate is 1.0 %.
- The GDP growth rate is 5 %
- Personal income continues to equal 84% of the GDP.
The effect of inflation, if any, is not included. I have been assured
by economists that inflation may be controlled and the interest
rate may be whatever we wish. If the deficit is equal to the
expenditure, no taxes are needed except possibly for the interest
on the debt as shown on the graph. Taxes may be needed for
other reasons, such as wealth distribution and inflation control.
Revelation: Reagan Was Right
What is notable is that the Debt-to-GDP ratio reaches a limit.
It does not increase indefinitely, in spite of the large and persistent
deficit. It appears that the "more spending, less taxes" plan
of Ronald Reagan was realistic.
Perhaps the prosperity in the Clinton years is the result. Perhaps
"balancing the budget" is the quickest way to kill that prosperity.
But there is a time lag of several years so we may not see
it coming until too late.
Best policy: surplus in boom time, deficit in down times!
Maintain the Debt at a percent of the GDP.