Economist Gary Becker – “On the Debt Ceiling” (Becker-Posner Blog)

22 01 2013

A recent post in the Becker-Posner Blog (http://www.becker-posner-blog.com/) features the economic point-counter point discussions of University of Chicago Economist Gary Becker and legal scholar and Federal Judge Richard A. Posner.  A recent post by Gary Becker deals with the issue of the U.S. Debt Ceiling.  Gary Becker’s homepage is found here.

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Following are some excerpts from Gary Becker’s latest post (1/20/2012) titled “On The Debt Ceiling“, posted at the following web address: http://www.becker-posner-blog.com/2013/01/on-the-debt-ceiling-becker.html

On the Debt Ceiling-Becker

Various attempts have been made to introduce rules that limit the aggregate level of federal spending, such as restricting the growth in spending over time to be no greater than the growth in GDP (aside from wartime and other emergencies). Balanced budget proposals do not limit spending per se, but require that enough taxes be raised to cover whatever level of spending passes the legislature and chief executive. However, neither spending limits nor balanced budget rules have ever received enough votes from Congress, although many states and local governments do require a (nominally) balanced budget.
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The “debt ceiling” is much closer to balanced budget rules than to limits on federal spending since it tries to cap the budget deficits that are solely responsible for the growth in debt. As Posner shows, this so-called “ceiling” is not really a ceiling since it can be lifted by a majority vote in both houses of Congress combined with the support of the President. In fact, Congress has raised the ceiling more than 85 times since 1940, and 11 times since 2001.  More economically meaningful ceilings would relate debt to the level of GDP- and perhaps also to interest rates on the debt- since countries with higher incomes and lower interest rates can afford to carry higher debt levels.
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One good reason to have properly defined debt ceilings, even though the President and Congress must approve every piece of spending and taxing legislation, is to force politicians to discuss how this legislation aggregates to produce shortfalls or surpluses between total spending and total tax revenue. Budget deficits are far more common than surpluses in recent decades…..Raising sufficient taxes to cover large and excessive spending would be worse than keeping spending within reasonable bounds while financing some with debt.
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Ultimately, the only way to evaluate debt ceilings is to determine how much they affect the level and composition of spending and taxation. That would not be easy to do in a credible way because of the difficulty in determining the counterfactual; that is, what would have been spending and taxation by the federal government in the absence of the debt ceilings?

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While federal government spending in real terms has grown manyfold since the end of World War II, the ratio of debt subject to the debt limit to GDP was a manageable 57% in the year 2000. This ratio has grown rapidly since then, especially during the past four years, and it is now about 98%, higher than most other rich countries. Clearly, debt ceilings have not prevented spending and taxation from growing significantly over time. Nor would the present ratio of debt to GDP be a big problem as long as interest rates remain low.

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…what counts most for an economy is not the ratio of debt to GDP, but that of government spending to GDP. This ratio will increase or decrease as GDP grows slower or faster than government spending. A decline in this ratio would be achieved if GDP resumes its long-term growth rate of a little over 3% per year, and if the growth in entitlement and other spending were kept under control. It remains to be seen whether the American economy will regain its long-term growth rate, and whether interest groups and politicians will resist the temptation to have government spending continue to grow at a rapid rate.

Graph of Federal Debt: Total Public Debt

Graph of Federal Surplus or Deficit [-]

Graph of Federal Debt: Total Public Debt as Percent of Gross Domestic Product

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Economist Milton Friedman’s View re: Government Action and Economic Liberty (Capitalism and Freedom, 2002)

11 01 2013

In Milton Friedman’s book Capitalism and Freedom (University of Chicago Press, 2002), he addresses the question of ….”How can we benefit from the promise of government while avoiding the threat to freedom?” (pages 2-3)

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East Fork River, Denali National Park, Alaska, USA

 

Two broad principles embodied in our Constitution give an answer that has preserved our freedom so far, though they have been violated repeatedly in practice while proclaimed in precept.”

First, the scope of government must be limited. Its major function must be to protect our freedom both from the enemies outside our gates and from our fellow-citizens: to preserve law and order, to enforce private contracts, to foster competitive markets.  Beyond this major function, government may enable us at times to accomplish jointly what we would find it more difficult or expensive to accomplish severally.  However, any such use of government is fraught with danger.  We should not and cannot avoid using government in this way.  But there should be a clear and large balance of advantages before we do. By relying primarily on voluntary co-operation and private enterprise, in both economic and other activities, we can insure that the private sector is a check on the powers of the governmental sector and an effective protection of freedom of speech, of religion, and of thought.”

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The second broad principle is that government must be dispersed.  If government is to exercise power, better in the county than in the state, better in the state than in Washington. If I do not like what my local community does, be it in sewage disposal, or zoning, or schools, I can move to another local community, and though few may take this step, the mere possibility acts as a check.  If I do not like what my state does, I can move to another.  If I do not like what Washington imposes, I have few alternative in this world of jealous nations. ”

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The very difficulty of avoiding the enactments of the federal government is of course the great attraction  of centralization to many of its proponents.  It will enable them more effectively, they believe, to legislate programs that – as they see it – are in the interest of the public, whether it be the transfer of income from the rich to the poor or from private to governmental purposes.  The are in the sense right.  But this coin has two sides.  The power to do good is also the power to do harm; those who control the power today may not tomorrow; and more important, what one man regards as good, another may regard as harm. The great tragedy of the drive to centralization, as of the drive to extend the scope of government in general, is that it is mostly led by men of good will who will be the first to rue its consequences.”

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