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President Ronald Reagan's Great Insight

Very High Debt/Deficit Proposal

Graph of the Proposal: Financing Government: 2000-2100

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.

A Proposal

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.

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