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Friday, October 21, 2011

Buchanan Presents Why We Should Never Pay Down the National Debt at Kentucky

BuchananNeil Buchanan (George Washington) presents Why We Should Never Pay Down the National Debt at Kentucky today as part of its Randall Park Colloquium Series:

In the midst of the great budget battles of 2011, many commentators and members of Congress have set a goal of not just reducing the federal deficit to long-term sustainable levels, nor even balancing each year's cash-flow deficit, but of actually paying down the national debt to zero. In this presentation and article, Professor Buchanan explains what would be required to pay down the national debt, critiques the supposed advantages of doing so, and describes the high and growing cost that the country would face if it tried to reach what is actually a meaningless and arbitrary goal. Even under the most plain-vanilla assumptions, macroeconomic analysis shows that the best budgeting policy necessarily involves running annual deficits, such that the national debt grows over time, but at a rate that does not permanently exceed the growth of national income.

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Comments

Buchanan reminds me of the guy who wants the words spoken at his funeral to be, "He owed me a lot of money."

Posted by: Woody | Oct 21, 2011 12:33:47 PM

And we should never boil the easter bunny in rabbit stew. Not the worst intellectual exercise though, unless people take it the wrong way - that deficits don't matter.

Posted by: Matt | Oct 21, 2011 1:41:24 PM

Is it really true that "the best budgeting policy necessarily involves running annual deficits, such that the national debt grows over time, but at a rate that does not permanently exceed the growth of national income"?

What happens if national income shrinks, rather than grows perpetually? Isn't it unwise to continue making multitrillion dollar bets that future economic growth will somehow bail us out? After experiencing the pain of the current real estate crisis, I thought we had learned our lesson not to rely on rosy assumptions like these.


Posted by: S | Oct 21, 2011 5:31:48 PM

Re "What happens if national income shrinks..." If that really happens on a sustained basis, then we have a lot bigger problems to worry about than the debt. Unemployment being the major one.

There are two issues: The first is that the world needs a large, liquid, and risk-free instrument to save in. Only treasuries fulfill that. The second is that paying down the debt means that the government is taking money from the non-government sector, i.e. non-government spending is in deficit (unless compensated for by exports). This is not a good thing. With a growing population and rising GDP, we need more dollars.

Posted by: GaryD | Oct 22, 2011 4:18:02 AM