Reagan: It's time to strike back

DodgeGlobe.com ^ | January 30, 2004 | By Michael Reagan

[KAUAIBOUND]

I don't necessarily agree that the tax increase of 1993 helped the economy. I believe that the economy soared in the '90s in spite of the tax increase because of the monumental change in productivity created by widely available, cheap technology affecting both the manufacturing and service industries. Even a tax increase could not stop this quantum change.

For example, for an old structural engineer guy like me, my productivity and that of my employees increased drastically with the availability of cheap, fast computers and user-friendly engineering and drafting software. I was charging 15 to 18 cents per square foot for large (50,000 sf) warehouses in the mid-80's, doing almost all of the engineering and drafing by hand. By 2000, we were making larger profits charging 10 to 12 cents per SF. In inflation-adjusted 1985 dollars, that's probably 6 to 8 cents per SF.

[KAUAIBOUND]

Here on Kauai, there is definitely a housing bubble. In 1998, you could buy a condo in Princeville for $79K, now they list for $350K and upwards. But this is an isolated market. The cost of housing throughout most of the country has skyrocketed because homebuyers tend to buy as big a house as they can afford, and low interest rates allow a larger mortgage and higher purchase prices. When interest rates rise, prices will decrease somewhat. It's what I call the "bond effect", i.e. when interest rates increase, bond prices decrease.

[risk]

He belongs to history as furnishing one of the greatest examples of successful patriotism; he belongs to posterity as the instructor of future generations in the principles of liberty and freedom; he belongs to the present, to us, by his virtues and by his achievements. In 20 campaigns, on a hundred battlefields, around a thousand campfires, I have witnessed that enduring fortitude, that patriotic self-abnegation, and that invincible determination which have carved his statue in the hearts of his people. From one end of the world to the other he has drained deep the chalice of courage.
-- http://www.freerepublic.com/focus/f-news/1068922/posts, General Douglas MacArthur's Farewell Speech: the long gray line has never failed us.

[Fledermaus]

The ecomomy is not 'tied directly to the federal budget' but to think that fiscal policy is irrelevant is folly. When the goverment runs a deficit it competes with the private sector for investment dollars because it has to borrow money to pay its bills. Fortunately the US economy isn't a closed system, so capital can flow in to fill both needs in most cases. Unfortunately the largest current buyers of US securities are the Chinese. I'll leave you to consider the impact of that fact.

The "when the govt runs a defict it competes with the private sector for investment" is and has been a lie for decades. It's not provable beyond any measure of "competing for capital". First, the government's deficits are held in long term bonds. They used to be 30 years bonds with very low interest rates until Rubin cancelled them and switched to 10-15 year bonds with slightly higher rates. But in either case, this has NO EFFECT on private sector borrowing since there IS NOT one giant pie of captial investment where one dollar to government is one less to the private sector like a zero-sum game.

The tax rates and financed deficits are factored into the Federal Reserve interest rate decisions. Now, given the govt borrowing as you maintain, then under the higher deficits of the early Reagan administration it would have been impossible for all interest rates to get lower. The fact the deficits grew as a percentage of GDP and the interest rates (prime, mortgatge, consumer debt) were lowered disproves your contention on it's face.

As to your next statement, yes...the US is open to foreign investment. But your facts are skewed when you state it's the Chinese that are the largest "buyers" of US securities "currently". Yes, "currently", they are. But the largest HOLDERS of US Securities, i.e. long term bond debt, are still Great Britain, Japan, Canada and other countries that are our allies. China could continue their "current buying" trend for decades and never get close to those countries in security ownership.

And what's wrong with that? You, I'll bet money on, think that is a weakness we have...oh no, China will call in it's debt! Many see it as our strength, they won't want to harm their investment and thus are more apt to want our continued growth.