+2 votes
asked ago in Current Economic Issues by (930 points)
edited ago by
Why do I ask this strange question?
As interest rates increase, businesses on the margin (zombies) tend to be adversely affected. If interest rates rose enough, marginal businesses would struggle more, affect other businesses and could even trigger a recession.
The US government debt is rising. As interest rates rise, the government has to spend more to service that debt. We have seen US government debt rise briskly in the past year.
We have seen tax cuts which make the US government borrow money more. The effective tax rate for capital income and wage income is around 13% now according to the NIPA accounts. If one looks at the Laffer curve, surely effective tax rates are low enough on the curve that any decrease in tax rates simply leads to less revenue for the government. Then as the US government depends more on debt to continue, does it begin to appear like a "zombie business"?
Is the US government on the margin? How severely affected is the US government budget by the increase in interest rates, since the US government is having to rely more on borrowing than on taxes?
And if the US government's budget is severely affected by increasing interest rates, is its weakness going to adversely affect the broader economy? and How?
The US government will struggle more to provide quality public education, social safety nets, environmental care, infrastructure and other public services.
So to what extent can the US government be considered a "zombie business"?

1 Answer

0 votes
answered ago by (2.7k points)
Sorry about my imperfect English, I was born in Spain although I'm also American.

In my opinion, if you want to transform the US or some areas into atractive centers of business you have to stabilize the US currency first. Because the devaluation of the currency can make the investments less profitable. Taking into account this and the tax reduction following this first step, if investment start growing from abroad or foreign companies look at the US and find there a secure and cheaper nation where they can allocate their holdings (like Luxemburg or Singapur), the two steps can increase the revenue of the government, so in the Laffer curve the US would be in the center in the future.

The question is if the revenues of the government will cover its deficit. It's a risky bet to do this but it can boost the economic activity and attract wealth to the country covering or making a surplus on the goverment balance sheet.

If not the result will be an increasing debt that can only be shortened cutting public expenditures and decreasing the social welfare system.

Finally, I think that the rise of interest rates can be countered by the tax reduction. Only in the kind of companies that survive increasing their debt or "zombies" like you pointed out, the result will be the collapse, but it can be covered by more efficient and profitable companies created with these stimulus I took into account before.