Okay, let's start to work our way now through
the deficit hawk versus deficit dove debate.
And to begin, let's first distinguish between internal debt held by
a country's citizenry and external debt held by foreigners.
When most or all of the national debt is held internally by a country's citizens,
the deficit doves will argue that since we owe it to ourselves,
such a debt is not a problem.
However, to the deficit hawks,
if foreigners own a large share of a nation's debt,
paying interest on that external debt acts like
a tax on the nation's citizens by foreigners.
Of course, the result of such a debtor's tax is reduce consumption,
savings and investment so that over time,
servicing interest payments on the debt effectively reduces the nation's economic growth.
In addition, on the political front,
if a foreign country holds a substantial amount of the nation's debt,
that can expose the nation's economic and foreign public policies to
undue political pressures from outside interests.
Even if all of a nation's debt is held internally,
the government must still make interest payments to bond holders.
This can often mean higher taxes and as microeconomics teaches us,
such taxes inevitably distort the allocation of
a nation's resources and can lead to an efficiency loss.
At the same time,
paying interest on the internal debt also unfairly
redistributes income from the poor and middle class to the rich.
This typically happens because government bondholders, as a group,
tend to be wealthier than taxpayers as a group.
Deficit hawks insist that
a large national debt can place
an unreasonable burden on future generations that must pay off this debt.
However, the deficit doves counter that any debt incurred
now as a result of public investment will provide benefits,
not just a burden to future generations.
One of the most complex arguments against
running large budget deficits has focused on the role
of budget deficits stimulating the growth of trade deficits.
With all the implications for negative GDP growth,
higher trade deficits imply.
Can you think of why a nation's budget deficit might
also lead to an increase in that nation's trade deficit?
Take a minute now to think about this and then describe in a step-by-step way how
a budget deficit financed by selling bonds might increase the trade deficit.
Dr. Peter NavarroProfessor
