Last night I read a point of view by Walter J. Wessels on the fiscal policy, government spending and taxation. He talked about the Laffer curve and how it is a part of the guideline for our progressive tax system. The progressive tax system where rich pay more is a kind of built-in stabilizer for the economy since if someone were to become unemployed or take a lesser paying job in an economic downturn, their relative change in their impact on GDP wouldn't be as bad as far as taxes are concerned.

What I was more concerned about was the impact of government deficits. The formula for it is quite simple:

Government spending = Tax revenues + Deficit

The US government (read: the US citizens) have several trillion dollars of debt now, over 9 trillion according to the Treasury. With economic growth, people earning more a week than their grandparents, does that debt matter?

The theory goes that eventually that debt, sold as government bonds, will have to be paid back. From what I can tell, there will always be some amount of government bonds sold on the market, which is not mentioned as part of this theory. Considering that the debt will all have to be paid back, the citizens would have to be collectively saving the amount that is accumulating as public debt.

Just taking some rough numbers, I see the public has been saving roughly $200 billion a year according to the St. Louis Federal Reserve Bank. On the other hand, the US National Debt Clock estimates the national debt increasing at $1.65 billion per day. 1.65*365 = $602 billion of debt accumulation per year (a gap of $400 billion between what people are saving to have in reserve to have for paying off the national debt versus what is being accumulated.

Still, perhaps that doesn't matter. Economists have come to the conclusion that a deficit that stimulates the economy out of a recession into full employment will be a benefit, not a burden. So then we should examine were employment has been.

The Bureau of Labor Statistics unemployment chart shows over the last 10 years or so that we've been accumulating debt, we have already been hovering around full employment rates since 5 percent is considered to be about full employment level since some people will always be quitting a job to look for a better one or inefficient companies get self-weeded out of the economy.

So what happens then when the government is stimulating the economy with tax cuts, more active open market operations from the Fed, and so on? According to my reading, deficits incurred when the economy is near full employment can be harmful. If people were to stop buying government bonds to renew the outstanding pubic debt and fund the new projected debts in social programs like medicare, the only possible outcomes are for the government to reduce spending, increase taxes to pay for spending as it happens, attract international investment, or print more money. Printing more money is the one thing that will absolutely lead to inflation.

We have attracted lots of international investment over the years. You might recall just recently the US dollar fell pretty sharply against the Euro. People were dumping their investments here from international sources. A falling dollar makes it harder for US citizens to buy all the products that have moved overseas to be produced because we have to spend more dollars across the exchange rate.