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Some Uses Justify Heavy Government Borrowing

August 26, 1990

Some comments on James Flanigan's "Watch Out for Deflation, Not Inflation" column (Aug. 12):

* The high unemployment began in 1975 and, through 1987, constituted the third-worst record in a century--exceeded only by the great slumps of the 1890s and 1920s. There may be a question one day as to whether oil was the cause, or overcapacity on a worldwide basis.

* I remain surprised that people talk of the deficit as being historically high--not as a fraction of GNP, and the same holds true for government debt as a fraction of total debt. If the thinking that holds today had been used for policy in the 1940s, we could not have financed World War II. Why, then, is increased government spending so horrifying?

* Unemployment today is worse than indicated because of the addition of the military to the employed work force in recent years, and the vast increase in part-time workers.

I wonder why nobody has pointed to one of the most fundamental causes of the size of the S&L bailout. Since the deregulation of interest rates paid to depositors a decade or so ago, the interest rates paid depositors have constantly remained well above the inflation rate. Because interest rate payoffs are also part of the insurance up to the $100,000 limit, lots of depositors are making big profits on no-risk deposits--including drug dealers lured in by high rates. Paying off depositors at a "ceiling" of interest rates indexed to inflation would be reasonable, equitable and cost much less.

Look at it this way--if we stumble into war in the Middle East, nobody will worry about government borrowing--why would it be so awful to spend on education, infrastructure, etc.

FREDERICK C. THAYER

Los Angeles

Professor Emeritus

University of Pittsburgh's School

of Public and International Affairs

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