Robert Barro responds to the comment allegedly made by VP Cheney that went, "Ronald Reagan proved that defecits don't matter. He notes that what matters is not defecits - under certain conditions outlined by David Ricardo (discovered a hundred years later again by Barro himself in a doctrine now called "Ricardian Equivalence"), whether government funds its spending through debt or taxing, the outcome should not matter. The defecit does not drive up interest rates, nor crowd out private investment, if these certain conditions are met. But, what does matter is the level of spending itself. Reagan, according to Barro, successfully curbed taxation, but was not able to curb spending by Congress. The result was a high debt to GDP ratio. But, Reagan used that increasing defecit to eventually force Congress to curb their own spending. It's here, Barro said, where the defecit does matter.
It's an interesting article, too, simply for explaining the distortionary effects of marginal tax rates on the very rich and the very poor. I wouldn't mind getting a subscription to Business Week, if for no other reason than to get the monthly column by Barro and the montly column by Gary Becker.
Posted by scott at March 6, 2004 09:47 PM | TrackBackScott,
Here's an interesting article from Buchanon. The main point is not to debate the merits of proteconism over free trade but to stess the outcome of power when one country gives up it's manufacturing base to another. These three paragraphs say it nicely:
"Why are China and Japan subsidizing our consumption? For the same reason a drug dealer hands out samples of crack cocaine to school kids. To get them hooked.
By keeping the value of their currencies low, Japan and China not only keep their factories humming, as ours shut down, they are effecting the steady transfer of the factors of production from America to Asia. They are making this once self-sufficient Republic a future dependency of Asia, as we ship them our industrial base, our technology, factories, plants, and skilled jobs.
In classical liberal economics, free trade is win-win. But that is not true of power politics, where, as one nation rises, another recedes. As China knows and we have forgotten, trade is foremost among the means nations use to advance in industrial and military power at the expense of rivals. Great powers that run chronic trade deficits, with declining currencies, are invariably fading powers."
Do you think his premise is correct? Does having a strong manufacturing base give a country greater global power? Do advancing trade deficits equal fading power? If so, do you want China to be the greatest power in the world?