What can we do about national debt?

My answer to the question  : It is hard to cut taxes with high National debt. Monetary policy can only go so far in helping economic growth. In order to keep the interest cost of carry the National Debt, bond yields are too low so retired people don’t have enough income to pay their bills, investment returns for retirement savings plan will be lower and workers will have to either save more or work longer. ricodilello commented on The Multiplier, a theoretical concept invented by John Maynard Keynes in the 1930s

In another blog ricodilello refers to student loans and how they affect families and delay young people from buying a home, which in turn, cripples the economy.

So, you plan to spend (say) fifty thousand after-tax dollars to send each child to college.  This is a bad idea.  You don’t get what you pay for. You pay for what you get. What, exactly, does your child get for your money?  The first two years are wasted. Maybe more.

The average book assigned to college freshmen is at a 7th-grade level.   There are parents who pay for this. You should not be one of them. The RPC (Ron Paul Curriculum) suggests that a high school student should quiz out of the first two years of college. The exams cost about $2,000, total. A student can pay for this, and should.

RPC trains high schoolers to do this.    http://www.ronpaulcurriculum.com/public/department135.cfm

There are smart ways to earn an accredited college degree. Physically attending the first two years of college away from home is not one of them.

The above paragraphs are from the Ron Paul Curriculum website. My point is that students and families of students can save a lot of money for college to reduce their debt. That is where debt reduction must start. Ron Paul’s suggestion requires more initiative of the student and the support of the family to get him / her there. Do you set the example as a father? as a mother? as a family? Do you teach your children about debt? Do you pay off your credit card automatically every month? National debt does not come out of the blue. Our Senators and Congressmen willingly oblige to the public requests of more programs and more conveniences to get our votes. They conveniently forget having to scale back when the economy is down!

I am re-reading The 7 Habits of Highly Effective People by Stphen Covey. Habit 1 is to be pro-active instead of re-active. In the stimulus of going to college a pro-active response requires self awareness, imagination, and an independent will, by the student. He / she has the freedom to choose and their language should be: I can, I prefer, I will, instead of: I can’t, I must, if only. “If only my parents had enough money to send me to college.” They might, if the student would do the work and do the exams recommended by Ron Paul, thus saving two years of tuition plus room and board!

The Multiplier, a theoretical concept invented by John Maynard Keynes in the 1930s

The most fundamental concept in the whole of macroeconomics. The “multiplier” measures the eventual impact on the economy as a whole, GDP, of a sustained increase or decrease in public spending. An increase in such expenditure brings more people into work, they in turn will have more to spend, the companies whose products they buy will have more revenue, and will employ even more people. The initial impact is multiplied through the economy.  Paul Ormerod, an economist at Volterra Partners

Sounds simple, but what is that number? Economists cannot agree on that. The multiplier works both ways. If it is large, the economy will decrease substantially if GDP decreases, or increase substantially when GDP increases.  Most economists believe that figure is pretty small, but IMF chief economist Olivier Blanchard and his colleague Daniel Leigh published an IMF working paper on the size of the fiscal multiplier, according to Paul Ormerod, trying to prove that the multiplier is rather large.

So a fiscal contraction, the basis of the chancellor’s policies, will lead to a sharp reduction in GDP. Events have shown this to be wrong.  Paul Ormerod The IMF duo approvingly cited other estimates, derived from the exotically named dynamic stochastic general equilibrium (DSGE) models, that the multiplier is large. These models have been all the rage in both top academic circles and central banks. Blanchard eulogised them in a MIT discussion paper published three weeks before the collapse of Lehman Brothers in September 2008. “Great progress had been made with DSGE models in understanding how the economy really worked. The state of macroeconomics, he declared, was good (according to Oliver Blanchard in this publication).”  Paul Ormerod

My point is, that in my research, National debt is not all about economic models. Even the IMF cannot predict the economy! I did find it interesting, that the recession really did not affect GDP by that much, and that companies adjusted their production and seemingly, easily survived for the most part. It were the people who lost jobs and homes (7,000,000 of them!)

An inescapable problem for these highly mathematical models is that they do not take into account sentiment, the narrative which emerges around policy changes. Osborne’s fiscal contraction has gradually created a positive narrative across companies, so they are willing to create jobs and invest. Psychology rather than hardline math is needed to tell us what the multiplier really is in any particular situation.      Paul Ormerod is an economist at Volterra Partners, a visiting professor at the UCL Centre for Decision Making Uncertainty, and author of Positive Linking: How Networks Can Revolutionize the World.

QUESTION OF THE WEEK:

SO WHAT ARE SOME EXAMPLES OF HOW NATIONAL DEBT AFFECT US ECONOMICALLY?