01 March 2010

Thought Experiment


Except in time of war, the federal government shall have no power to tax but shall pay for all of its expenditures through borrowing, save only for fees charged to participants that cover the cost of their participation in enumerated voluntary activities.


Hey Skipper said...

Which means that, until the moment a war breaks out, there is no military.

Bret said...

A government can borrow at the nominal rate of GDP growth indefinitely. However, it's interest rate will be approximately the inflation rate plus 1% to 2%. So the effective real rate of sustainable borrowing is approximately real GDP - 1.5%, or, for the U.S. a bit over 1% of GDP.

That certainly would limit the size of the federal government. Which might mean that real GDP growth would be substantially higher which might mean they could borrow a bit more.

However, a second problem is that taxes are required to set the value of a currency. Any rinky dink country can have its own currency if-and-only-if they collect taxes in that currency. Otherwise, the currency becomes unstable and its citizens would choose to use other money instruments.

erp said...

David, are you postulating an armed militia of private citizens or the national guard as our first response? Surely, unlike the revolutionary war days when it took weeks for information to get around the land, in today's world, we need to be able to respond instantly to even a threat of an attack.

We can sort out accounting procedures after we win the war.

David said...

Skipper: That's part of the question. Would the government spend less, and if so, why? And if it had to spend less, why would it be the military that was cut? Military spending is about $850 billion. That doesn't seem like an insurmountable debt burden.

Bret: I think you underestimate the amount a government can borrow. In fact, we're already borrowing more than that and have for a while.

Also, I don't understand your link between taxes and currency. Why do you think that a currency is no good if the government doesn't tax? No one thinks the US could actually redeem its currency and, in fact, governments are losing control of the money supply.

A government that doesn't tax is (analytically) something like a business that doesn't pay dividends. People still buy the stock, assuming that someday value will be distributed. People will buy the debt because, theoretically, the debt will be paid some day, even if all anyone ever actually gets is interest.

In the meantime, debt financing has these benefits: it's voluntary; it has to pay its way v. other investments; and it probably will impose some spending discipline. The mirage that we now have of middle-class entitlements -- the fantasy that we make money by having the government take our money all through the year and then give it back to us either in April or in benefits -- would be lost.

Bret said...

David wrote: "In fact, we're already borrowing more than that and have for a while."

I didn't word it particularly well, but our average deficit post-WWII pre-Obama was under 3% of GDP. Subtract the abit more than 1% of GDP interest paid, and the effective net borrowing was a bit over 1% of GDP.

As far as taxes defining the value of money, this post of mine explains it better.

I'm not understanding your comparison of taxes and dividends. Seems to me taxes are much more like revenue. A major problem is that the government doesn't distribute the taxes as dividends. Instead, it spends the money on itself so it's basically wasted.

Harry Eagar said...

I am reading 'Road to Serfdom' (and laughing my head off every other page), but one screamingly obvious question arises:

If businesses, armies, libraries, transportation networks, factories etc. get bigger, why shouldn't government?

Susan's Husband said...

Doesn't this set you up for the resource curse in a different form? Why wouldn't such a government borrow massively then inflate the debt away? Or just go broke after the current ruling class has finished looting?

erp said...

Harry, a better question is, other than hiring more people to process increased revenues, why should the government get bigger?

The road to peace and prosperity as has been demonstrated repeatedly, requires nothing more than for the government to get the heck out of the way.

Bret said...

Susan's Husband asks: "Why wouldn't such a government borrow massively then inflate the debt away?"

If there are no taxes, such a currency would have no value and nobody would lend in it or use it for any sort of exchange. The government could not inflate away debt held in other currencies.

Hey Skipper said...


Skipper: That's part of the question.

Which I would have noticed had I actually read the question carefully.