We Doubt It
Joe Cobb's article "A Dubious Debt Doubt" (Aug.) seems to promote the idea that borrowing short and throwing away long is good government policy which nullifies ill effects from deficit spending and mushrooming national debt.
Maybe he can push a rope uphill too.
Doubting the Debt Doubt
Joe Cobb's argument seems to be as follows: 1) Government must pay interest on its debt. 2) Inflation of the money supply causes higher interest rates. 3) Therefore, the debt "helps to prevent inflation." Cobb makes a number of assertions that call for comment.
After saying that "most people believe the national debt or the annual budget deficit…are terrible economic things, monsters that cause all sorts of economic problems," Cobb indicates his rejection of this view: "The view that the debt must inevitably lead to inflation in the long run is widely held, but it is entirely wrong. Not only is there no connection in our modern economic system between government debt and inflation, but the very existence of the deficits—the government's ongoing need to borrow—helps to prevent inflation!"
Note the universals in this statement: "entirely wrong," "no connection." Surely this is not the case. Is there really "no connection" between "government debt and inflation"? None at all?
There is, first of all, the connection that Cobb himself argues for: higher inflation causes higher interest rates, which in turn cause higher debt. But also, the argument that the debt has no connection with inflation assumes that the members of the US Congress understand and believe the following:
• Inflation of the money supply causes higher interest rates.
• Higher interest rates lead to higher deficits.
• Deficits are bad and must be avoided.
Cobb's article, moreover, is riddled with false statements. For example, he apparently means obligations with maturities of five years or less when he speaks of "short-term securities." These, he says, "are not vulnerable to inflation." Absurd. Even at a 3 percent annual price inflation rate, five-year notes will lose more than 16 percent of their value. Of course, I do not believe we shall have a 3 percent price inflation rate during the next five years, and during double-digit inflation—say only 10 percent per year—a one-year obligation is not invulnerable to inflation.
It is true that short-term debt is less vulnerable than long-term, but less vulnerable is not invulnerable. Couple that with the government's somewhat successful efforts to extend the average maturity of its obligations, and we see an organization seeking to put its creditors into a highly vulnerable position.
The whole argument that deficits are salutary because they are "a government's primary incentive to hold down its inflation rate" is akin to arguing that heart disease is good because it is a primary incentive to lose weight.…
Debtor Late Than Never
Joe Cobb's case that governments can't inflate the debt away is not entirely accurate. For example, his comments about the Balanced Budget Amendment are misleading.
SJR 58, which was passed by the Senate August 4, 1982, would limit taxes, stop off-budget spending, prohibit deficits, and cap the debt.
Short-term obligations average 60 percent of the total public debt. Refinancing this maturing debt contradicts his conclusion that "the achievement of that (balanced budget) policy would take away a government's primary incentive to hold down its inflation rates. If the Treasury didn't have to sell T-bills every week, it wouldn't have to worry about the discount that its lenders demand as an inflation hedge."
How would Cobb refinance without T-bills and notes? Bank-restricted bonds could replace maturing short-term debt. The banking system would "monetize" this debt (more inflation)! However, recent trends do not substantiate this possibility. The Fed has reduced its exposure 45 percent since 1973, while the "people" hold 70 percent of the debt.
Another option to T-bills is private purchase of more bonds. In that case, guess who is likely to end up holding the Old Maid?
James C. Graw
Port Huron, MI
Mr. Cobb replies: I am sorry that my article has been misread—I certainly never argued that deficit spending or a ballooning national debt are good things. The main point of my article is that opposition to current lascivious fiscal policy ought to be based on some arguments stronger than the (wrong) assertion that a growing national debt must eventually cause inflation.
Inflating the money supply makes the debt burden more difficult to carry, because it drives up interest rates. The debt burden is bad enough—a transfer payment from workers and taxpayers to bondholders and their children.
If the government resorts to inflation in the future, for whatever reason, the debt burden will grow heavier—not lighter. This is due to the nature of a modern, credit-monetary system that has no anchor in gold or silver coins. All of the "conventional wisdom" about the debt leading to inflation tacitly assumes a classical monetary system. If you check your premises, and remember that politicians are self-seeking individuals, the prediction about inflation disappears.
I just wanted to make the point about the treacherous nature of our monetary system, because if we can kill the idea that inflation is somehow a solution to economic problems, maybe we can prevent Congress or some future president from adopting inflationary policies. Inflation is not a solution to excessive debt, which is an economic evil for reasons that have nothing to do with inflation. I certainly do not advocate deficit government spending, which only makes the future problem worse.
The long-run problem of the government debt is the same as the problem with every other transfer-payment "entitlement" program: it works against the system of incentives, reward for achievement, that makes a free market dynamic. Interest on government bonds, paid to the grandchildren of today's upper class, is a future social problem—not a current economic problem.
But most important, let's face reality about the debt: nothing is gained by telling ghost stories about inflation, which are not believable. That's a sure way to revive the old Keynesian nonsense that "we only owe the debt to ourselves."
Jack Wheeler's series of reports on visits to rebel groups (see, most recently, "The New Liberation Movements," June-July) has been very interesting, but I am uncomfortable with his implied suggestion that the US government assist them.
US government aid to the rebels—on the grounds that they are anti-communist and speak of freedom or individual rights—could only be justified if the US were in immediate, serious danger. Not even in Central America can that case be made. The Sandinistas may eventually build bases to be used by the Russians; let's cross that bridge when—or if—we come to it. Even that scenario probably doesn't meet the clear and present danger test.
In each of the situations that Wheeler describes, except Afghanistan, it's very difficult to tell who the good guys really are. The situation in Central America is murky, to put it mildly, with significant indigenous support on all sides, with reports of atrocities being committed by all sides. No one can be sure that the contras would not be as evil as Somoza or the Sandinistas.
In Angola, Jonas Savimbi is creating a whole cult based on his personality. What will he, or his followers, do to the opposition, once in power? And in Kampuchea, the rebels take arms from the Chinese communists to fight against people armed by the Russian communists. Maybe expediency, maybe necessity, maybe a sign that the US government had better keep its distance.
It appears that in Afghanistan there is clear-cut good and evil. But the US government has no national security interests to protect here. "Stopping communism"—the old domino theory—is not enough. And anyone who has watched our State Department and CIA over the last few years knows that they'll screw it up, anyway.
Perhaps Wheeler could be working toward repeal of the laws that prevent US citizens from providing military aid privately. If he succeeds, however, supporters of the regimes he opposes will also be out there seeking money and arms from US citizens. No one ever said that the good guys would always win in a free society.
We can cheer for the rebels, some of us can adopt a guerrilla, but please, don't propose using my tax money to buy arms for groups that I haven't personally chosen to support.
Santa Barbara, CA
Where Have All Our Values Gone?
I confess embarrassment. Edward Cline's splendid essay in your August issue ("What Are People Really Nostalgic For?") evoked in me a sense of…well, of nostalgia. I began to yearn for a time when essays of such quality were commonplace. I began to lament the passing of the Enlightenment, whose children could integrate such diverse social phenomena with comparable fluency and eloquence.
By implication, Cline's essay demonstrates the inadequacy of any case for liberty grounded solely in politics or economics. And by contrast, it demonstrates the rich persuasiveness and explanatory power of an interdisciplinary perspective grounded in a philosophy of reason. His is the sort of cultural analysis too long absent from journals promoting liberty: an analysis rooted in values, rather than floating political "axioms." The essay is a credit to its author and its publisher. I look forward to seeing more of the same from both.
Robert James Bidinotto
New Castle, PA
Robert W. Poole's editorial in the August issue ("How Not to Privatize") hits the nail on the head. Shifting activities from higher to lower levels of government is not privatization. It represents balkanization.
Also, Poole's speculation—that the Grace Commission was incorrect in concluding that no one would bid on the federal government's National and Dulles airports—is correct. For example, Lockheed Air Terminals, Inc., has expressed—through the Joint Economic Committee, where Sen. Steve Symms (R–Idaho) is holding hearings on "Privatization of the Federal Government"—an interest in various privatization options for National and Dulles.
Steve H. Hanke
Joint Economic Committee
If Johnny Came Marching Home
Tibor Machan's editorial "The Defense Difference" (Aug.) failed to examine how much of the defense budget is actually for defense and how much is for foreign intervention. Most of our troops are stationed outside the United States. Recent studies have shown that our military budget could be substantially reduced by concentrating on defending our own citizens.
Philip C. Washburn
Your August Spotlight column about me was well done, but it needs some corrections.
First, I'm not the "most widely published architectural writer in the world." I will be at some point during the next year or so, but for now that's a misstatement which a visit to any library would quickly reveal.
Second, although I lecture at times at UC Berkeley architectural school, I don't teach there as a member of faculty. To suggest otherwise would discredit me badly.
Third, the "girl friend" cited in the article was my mate and business partner for many long years and deserves acknowledgement as a full partner in many years of my work: Marjorie Zak, then Marjorie Stitt, and now Chandler. I expect you'll see many valuable contributions from her in the international human rights scene in the years to come.
Fred A. Stitt