"The Deficit Danger"

An interesting piece in the current Harvard alumni magazine, which not only warns about the inevitability of large deficits under current policies but draws a direct connection between deficits and their undesirable social consequences:

"Most important, however, continuous large budget deficits, maintained year after year even at full employment, take away the economy's means of achieving economic growth. President Bush and other members of his administration have hailed the changes in the structure of taxes that have gone along with his series of tax cuts—most recently, the reduced tax rate on corporate dividends—arguing that they will help promote investment and growth. That might be right, if everything else stayed the same. But everything else isn't staying the same: the harm done to America's investment and growth by large chronic deficits will likely outweigh any spur that might otherwise come from changing the structure of taxes.

"In the end, the most fundamental threat that the president's big-deficit policy poses is not to the U.S. economy but to the character of American society. Countries where living standards for the majority of citizens improve over sustained periods of time are more likely to seek and preserve an open, mobile, tolerant society and to strengthen their democratic institutions. Countries where living standards stagnate, or even erode, instead mostly tend toward rigidity and intolerance, and their democracy weakens.

"The United States is no exception. Living standards have improved over most of our country's history, and over time our society has become more open and tolerant and our democracy has broadened and strengthened. But even in America these basic values are at risk when our living standards stagnate. Median U.S. family income showed virtually no increase, beyond inflation, from the early 1970s to the early 1990s. Much of what happened during that time—the rise of the "militia" movement, the wave of ugly xenophobia, the open retreat from generosity toward our own most disadvantaged citizens—was the predictable pathology of a society whose citizens knew they weren't getting ahead."

http://www.harvardmag.com/on-line/010449.html

innovation; I saw this during the Reagan deficits, and I'm seeing it again now. When you make an invention or manufacturing innovation, you have to make a business case, and part of the business case is comparing the probable return-on-investment with the probable interest rates over the lifetime of the product or manufacturing equipment. Big deficits mean high interest rates sooner or later (usually sooner) -- and no MBA will countenance rolling out a new product or innovation if they can get a better return by buying a bond or putting the money in the bank.

Which is why Reagan-Bu$h style deficits mean technological stagnation -- and why the future probably belongs to Europe, Japan, and the far east.

Thanks!