There Was No “Stimulus” Spending in Aggregate

One of the claims that Tea Partiers, Republicans, and conservative/neo-liberal economists have been making for some time is that “the stimulus has failed”. They conclude that Keynesian economics and economic policies are failures.  Since, like most claims of Republicans and other politicians, these assertions are usually repeated uncritically by the news media, it’s close to becoming accepted “common wisdom” that the stimulus failed.  It’s not true, though.  What happened is that Keynesian stimulus was never tried.  Yes, U.S. federal government spending temporarily increased for 2 1/2 years.  But the so-called “stimulus” bill of $780 billion passed in Feb 2009 wasn’t all a stimulus spending bill. Much of the money, approx. $380 billion IIRC, was tax cuts.  People didn’t really spend much of those tax cuts because they were paying off debt with the money. That’s not a Keynesian stimulus spending program.  Keynes pointed out that tax cuts are a weaker way of stimulating spending.

But most important is that the additional spending was over 2 1/2 years, and it was only federal spending.  It was completely offset by cuts in spending at the state and local government level.  In aggregate, there was no stimulus spending program. It’s now over anyway.  What people are doing these days is confusing the increased deficit with increased spending, ignoring the fact that the deficit is so big because tax collections are down. Tax collections are down because too many people aren’t working.  And firms won’t hire those people because nobody (including aggregate government) is spending enough.

Paul Krugman notes:

In effect, although without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again.

What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending. Here’s total (all levels) government spending over the past 10 years:


Looking at this graph, if you didn’t know there had been a “massive” stimulus, would you even have suspected that there had been any stimulus at all?

I Repeat: Social Security Is *Not* the Problem

I’ve observed it before, but it deserves repeating.  Social Security is NOT the cause of any present or future Federal government deficits. Social Security is NOT financially troubled. Social Security IS financially sound.  To the extent the Federal government has a deficit problem (which in reality is much less than people think, but that’s another topic), it is not due to Social Security. Mark Thoma says it clearly:

Barking Up the Wrong Tree: Social Security is *Not* the Problem

[Source: CBO]

Though there seems to be a concerted effort to get people to believe otherwise, Social Security has very little to do with our long-run budget problem.

I think a couple of the comments that Mark received on this post also shed some light on why we’re told we need to cut Social Security:

reason said…

The only people with a serious interest in undermining SS are Wall Street. They should be hung, drawn and quartered. Political reform is desperately needed in America (as is an informed, critical public and more transparence – but one thing at a time).

bakho said in reply to reason

Great Graphic. This graphic should be posted once a week and used as widely as possible to educate the media and the politicians.

SSTF is a huge pot of money. Wall Street salivates at the thought of collecting fees on $Trillions in long term investments.


More re: National Debt

Just after I finished my Background Info on National  Debt post, I ran across this from James Galbraith at New Deal 2.0. He does a nice job of pointing out some of the errors of the “oh-my-god-the-deficit-is-going-to-destroy-us-if-we-don’t-cut-grandma’s-social-security” crowd. For  those not aware, Pete Peterson is a billionaire that has spent millions trying to frighten people with the deficit and persuade people to cut government spending benefits to people less fortunate than him. He paid for a substantial portion of the Obama Bi-Partisan Commission on Fiscal Responsibility – the ones who recommended cutting Social Security, a sound healthy program. He has also contracted with Columbia Univ. Teachers College to produce propaganda “educational materials” for elementary school children about the national debt, or at least as Peterson understands the debt. Of course, as we learn from Galbraith, Peterson and his foundation don’t really understand it very well:

Economist James K. Galbraith goes behind the scenes at a Pete Peterson gathering of deficit hawks to see what they have to say.The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

Mr. Bixby began by describing the public debt as “the defining issue of our time.” It is, he said, a question of “how big a debt we can have and what can we afford?” He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change. Oddly none of those issues were actually mentioned by anyone, all evening long.

A notable feature of Bixby’s presentation were his charts. One of them showed clearly how the public deficit soared at the precise moment that the financial crisis struck in late 2008. The chart also shows how the Clinton surpluses had started to disappear in the recession of 2000. But Mr. Bixby seemed not to have noticed either event. Flashing this chart, he merely commented that “Congress took care” of the budget surplus. Still, the charts did show the facts — and in this respect they were the intellectual highpoint of the occasion.


A David Walker speech is always worth listening to with care, for Mr. Walker is a reliable and thorough enumerator of popular deficit-scare themes. Three of these in particular caught my attention on Friday.

To my surprise, Walker began on a disarming note: he acknowledged that the level of our national debt is not actually high. In relation to GDP, it is only a bit over half of what it was in 1946. And to give more credit, the number Walker used, 63 percent, refers to debt held by the public, which is the correct construct — not the 90+ percent figure for gross debt, commonly seen in press reports and in comparisons with other countries. The relevant number is today below where it was in the mid-1950s, and comparable to the early 1990s.

But Mr. Walker countered that fact with another, which I’d never heard mentioned before: in real terms he said — that is, after adjusting for inflation — per capita national debt is now twice what it was back then.

The problem is that real per capita national debt is a concept with no economic meaning or importance. (No government agency reports it, either.) Even in the private sector, debt levels matter only in relation to income and wealth: richer people can (and do) take on more debt. Real per capita national income is well over three times higher today than it was in 1946 — so how could it possibly matter that the “real per capita national debt” is twice as high?

Next, Mr. Walker made a comparison between the United States and Greece, with the implication being that this country might, some day soon, face that country’s interest costs. But of course this is nonsense. Greece is a small nation that has to borrow in a currency it cannot control. The United States is a large nation that pays up in a money it can print. There is no chance the markets will mistake the US for Greece, and of course they have not done so.

Finally, Mr. Walker warned that “foreign lenders… can’t dump their debt but can curb their appetite” for new US Treasury bonds. This was an oblique reference to the yellow peril. The idea, when you think about it, is that the Chinese central bank will acquire dollars — which it does when China runs an export surplus — and then fail to convert them into Treasury bonds, thereby choosing, voluntarily, to hold dollars in cash, which earns no interest, instead of as Treasury bills, which do. Mr. Walker did not try to explain why this would appeal to the Chinese.

Walker closed by calling for action tied to an increase in the debt ceiling; specifically for a hard cap on the debt-to-GDP ratio with “enforcement mechanisms,” which could include pro rata cuts in Social Security and Medicare benefits and tax surcharges. He did not specify whether the cap should apply to gross federal debt or only to that part of the debt held by the public (a number which the Federal Reserve can change, any time it wants, by buying or selling public debt). When pressed, in the question period, he would not even say what he thought the cap should be.

I waited for Ms. Rivlin to add something sensible. But she did not. Apart from some platitudes — she favors “serious tax reform” and “restructuring Medicare” — her interesting contribution was to restate Mr. Walker’s comment about “foreign lenders,” who might say “we’re not going to lend you any more money.” That this would amount to saying “we’re not going to sell you any more goods” seems — from a question-and-answer and brief exchange afterward — genuinely not to have crossed her mind.

The Fiscal Solutions Tour comes with a nice brochure, and even (in my case) with a flash drive containing Mr. Bixby’s powerpoints. But does Mr. Peterson think he’s getting his money’s worth? The President, in his State of the Union, mostly ignored him. The Bowles-Simpson effort (which he paid for in part) and the closely allied Rivlin-Domenici plan are fading from view. And as the House Republicans forge their own course, demanding radical spending cuts right now — for political rather than economic reasons, which they don’t even bother to explain — the tired and shabby arguments of these old deficit-worriers hardly seem connected, any more, to the battles at hand.

James K. Galbraith is a Vice President of Americans for Democratic Action. He is General Editor of “Galbraith: The Affluent Society and Other Writings, 1952-1967,” just published by Library of America. He teaches at the University of Texas at Austin.

Background Info on U.S. National Debt

This is another post in response to a student request.  Here are some links that provide background information about the U.S. national debt.

First, the definitive sources:

  • for the exact amount of debt by year:  U.S Treasury Direct – Reports:
    • this site also has links, graphs, charts on the makeup of the debt by maturities, interest rates, types of bonds, etc.  Even has detailed info on U.S. Savings Bonds
  • for the official story of how the debt happened, how it was managed throughout U.S. history: U.S. Bureau of Public Debt - – a series of 6 pages, covering the whole history.
  • for some more facts, graphs, and some analysis: see Wikipedia:
    • Be warned, however, the Wikipedia article repeats a lot of commonly believed, but factually incorrect statements such as “spending must be financed by borrowing” and that “entitlement spending such as Social Security” pose a “risk” – see below.
  • for a decent, factually correct analysis, albeit a politically biased toward progressive policies analysis see:  Z Facts – – several other links and pages explaining some misconceptions

Overall, anybody researching or thinking about the U.S. national debt, should keep in mind that there’s a LOT of nonsense circulating about U.S. government debt. To correct these misconceptions, keep in mind the following:

  • Debt is the accumulation of past deficits, if those deficits were “financed” with borrowing. Deficits are the difference between government money-in and money-out. Money-in is Taxes. Money-out is GovSpending + GovTransfers. If money-out exceeds money-in, you have a deficit.
  • Deficits do not necessarily have to be “financed” by borrowing, but the U.S. government has long voluntarily followed a policy of borrowing each year to cover the deficit, although it doesn’t necessarily do so month-by-month. The alternative to borrowing to “finance” a deficit in a modern system is to issue checks to pay for spending and let the central bank (Federal Reserve) create bank reserves when the checks are cashed.
  • Any analogy between a household’s finances and the national government is false. There is no such valid comparison.
  • As long as a national government issues it’s own currency, that currency is not fixed in value (convertible) to anything else (other currency or gold), and the government borrows in it’s own currency, then it cannot default or go “bankrupt” or “insolvent” unless it voluntarily chooses to do so to screw the bondholders. This applies to US, Australia, Japan, UK, Canada, etc, but not to countries inside the “eurozone” – they don’t have their own currency.
  • National deficits, and hence debt, almost always goes up during a war. Vietnam war was a bit of exception.
  • When comparing debt levels between different years/eras, it is critical to adjust for:
    • inflation – use “real dollars” or “constant x year dollars” if looking at the debt in dollars
    • size of population and the economy. -  The best measure of the relative size of the debt is: debt-to-GDP ratio.
  • Three things that really balloon the size of deficits and hence debt levels:
    • War
    • Depression or recession – since tax receipts are generally based on economic activity (income tax), anything that slows the economy slows tax collection and raises the deficit.
    • Major income tax cut programs when combined with major new spending intiatives.  This was rare in early US history, but big in Reagan years and Bush II years.
  • One thing that really reduces deficits and hence, slows the growth of debt:
    • a growing economy, especially as it nears full employment (explains Clinton years)
  • Government bonds/debt is NOT a “burden” on children or grandchildren.  It does not have to be paid back. If the borrowed money is spent on things that improve or stimulate econonic growth, then the “children” and “grandchildren” inherit a larger, more productive economy that can pay for the debt interest.
  • Government bonds are not really like household debt or corporate debt, or even state-government debt. The best way to think about government bonds is that they are just like currency except they pay interest.
  • It is possible to have too little national debt. Banks in particular need to have a certain amount of government bonds among their “assets” because they provide a liquid asset.  In recent years, the Australian government, when running a series of surpluses was asked by the banking community to issue new bonds anyway.

I have more on the national debt and those promoting the idea that the debt is the number one problem in U.S., on tax cuts, deficits, and debt, and on how the U.S. cannot go “bankrupt”.

One More Time, the Government Is NOT Like a Household or a Business

Ron Dzwonkowski of the Detroit Free Press ran a column today urging people to participate in various “town hall” discussions to help figure out the US can deal with it’s “deficit” and the “debt” that must “lead to collapse”.

Mr. Dzwonkowski adopts the posture of  “reasonable, practical man” – not that of an ideologue.  In fact he appeals to “basic math and logic”.   But again, we see that Keynes was right:   Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Mr. Dzwonkowski is the slave of defunct economists from the late 1800′s and early 1900′s when gold and bankers reigned supreme.  This is not the world we live in today.  The following is the text of the email I sent him.

I was most disappointed in your column on Sunday, June 20. There are many reasons for my disappointment, but the greatest is your repetition of economic nonsense that is flatly, factually wrong.

I quote your opening:

Basic math — and logic — says you can’t keep spending almost $2 for every $1 in your pocket. However, neither rules in Washington, where our national government now adopts budgets that authorize spending more than $1 trillion beyond tax collections and has accumulated a debt in excess of $13 trillion, a simply incomprehensible number…..This can’t go on; it’s a formula for collapse.

Actually basic math and accounting (and “logic”) brings the exact opposite conclusion. I believe you have fallen prey to a very common error, an error that is promoted by people who know better (or should) but have reasons to keep people believing the error. The error is simple:

You assume that the national government is the same as any household or any business or any corporation. It is not.

Households, businesses, corporations, and even state governments are all “financing-constrained”. This means that before they can spend, they must raise the funding through either revenue (income or taxes depending on the entitity), borrowing, or selling assets. SImply put, they must have something in the checking account before writing the check to spend.

A national government is NOT the same as these other entities. A national government CAN and DOES spend without any restriction on raising the funds first.

For these purposes, I’m using a “national government” to mean one that is:

a. sovereign in it’s money (in other words, it is the sole source of determining what is money/legal tender inside it’s territory)

b. let’s it’s money float in exchange rate and doesn’t promise a fixed conversion rate into any other currency or gold

c. borrows money in it’s own currency (when it chooses to borrow) and not a foreign currency.

Who fits this definition? The U.S., Japan, Canada, the U.K., Australia, India, among many (most) others. Who doesn’t fit? Anybody in the Euro Monetary Union (Greece, Spain, Italy, France, Germany, etc). Who else doesn’t fit? Anybody that borrows in foreign currencies (Russia & Argentina in the 1990′s).

What I am explaining is not “an economic theory” – it is basic, fundamental national income accounting and fundamental banking procedures.

The blunt truth is that the U.S. can indeed continue to run deficits. The same people who claim that we are on the verge of collapse (as you claim is obvious) said exactly the same thing about Japan in the mid-1990′s. A decade and a half later Japan is still running “high deficits” and has no problem with either it’s budget or “solvency”.

The blunt truth is that when unemployment is well in excess of 9% nationally, any attempt to reduce deficit spending now by cutting spending or raising taxes will only further contract the economy, reduce actual tax collections and make the actual deficit bigger (see Ireland over the last 2 years).

The fundamental economic reality (again, basic math and accounting, not “theory”) is that if the private sector, you and me and private businesses, want to get financially richer, that is if we want to see our bank balances and 401K’s get bigger over time, the government, the public sector, must run a deficit. It is simply impossible for the private sector to net save money AND have the government run a surplus at the same time. (technically, there is one situation where it is possible, but that can ONLY happen if net exports is so large – think 20% or more of GDP – Chinese scale. Such large net exports cannot happen in all countries at once).

These are not the thoughts of sole “crank professor”. I could provide plenty of support for everything I’ve said. In fact, if you are interested, I would be happy to discuss it further and help you learn.

I am distressed because I work so hard to educate students to think critically, evaluate the evidence, and make sound “logical” conclusions. But I can only reach maybe 150 students per semester. You, however, reach thousands of people and you repeat what are eggregious errors of math, logic, and accounting, while repeating these fallacies while posturing as a neutral adult voice of reason. I could leave it at that, except that this epidemic of illogical thinking about government budgets has consequences. Social services will be sacrificed on an the alter of 1800′s economics theory where governments were constrained by what gold the bankers would lend them.

Interesting Stuff – Good Stuff This Week

  • Bruce Bartlett (a Republican) does a pretty good job defusing myths and fears about the federal debt at  What is the National Debt? He still misses how a deficit is necessary to ensure an adequate money supply without forcing the private sector to go into increasing debt, but overall good job.  No monsters here, so let’s move along.
  • Bill Black, one of very few criminologists to study how corporations commit crime, on Top Ten Ways to Crack Down on Corporate Financial Crime.

Supply Side Arguments for Tax Cuts for the Rich Ignore both Theory and Evidence

One of the political-economic legacies of the late 1970′s and early 1980′s was a belief in  supply-side theories of tax cuts as an “engine of growth”.   Republicans have claimed this as  a legacy from Ronald Reagan.  In fact, however, the cutting of top marginal income tax rates was started by Jimmy Carter.  Under Carter’s administration the top marginal tax rate (MTR) was reduced from 70% to 50%.   Under the first of the Reagan cuts, the top MTR was cut further to 38%, and then later to 33%.  The claim had been (and still is by some) that reducing the MTR’s improves the incentives to work resulting in more people working harder & longer & making more income (thus more GDP).  The inverse has also been argued as a reason why MTR’s can never be increased, particularly on upper-income brackets.

This logic, carried to an extreme under the Bush II administration brought us the first attempts to fight two major (in $ terms) wars and finance them with tax cuts instead of taxes.  It hasn’t worked.  Part of the reason is because such supply-siders ignore part of the logic and theory of why people work.  Yes, higher tax rates reduce my incentive to work longer because they reduce the take-home pay rate I get for longer hours.  But the lower income also motivates me to work longer and harder to maintain the same absolute dollar income.   Theory is indeterminant about which effect dominates.  However, experience is not indeterminant.   MTR’s as incentive mechanisms are very weak.

Trickle-down theorists are quick to object that higher taxes would cause top earners to work less and take fewer risks, thereby stifling economic growth. In their familiar rhetorical flourish, they insist that a more progressive tax system would kill the geese that lay the golden eggs. On close examination, however, this claim is supported neither by economic theory nor by empirical evidence.

The surface plausibility of trickle-down theory owes much to the fact that it appears to follow from the time-honored belief that people respond to incentives. Because higher taxes on top earners reduce the reward for effort, it seems reasonable that they would induce people to work less, as trickle-down theorists claim. As every economics textbook makes clear, however, a decline in after-tax wages also exerts a second, opposing effect. By making people feel poorer, it provides them with an incentive to recoup their income loss by working harder than before. Economic theory says nothing about which of these offsetting effects may dominate.

If economic theory is unkind to trickle-down proponents, the lessons of experience are downright brutal. If lower real wages induce people to work shorter hours, then the opposite should be true when real wages increase. According to trickle-down theory, then, the cumulative effect of the last century’s sharp rise in real wages should have been a significant increase in hours worked. In fact, however, the workweek is much shorter now than in 1900.

via In the Real World of Work and Wages, Trickle-Down Theories Don’t Hold Up – New York Times.

One implication is that the U.S. could raise MTR’s on upper income taxpayers without slowing growth.  In particular, a top candidate should be hedge fund managers and other Wall St. traders that use loopholes introduced in 2001 to pay a lower tax rate than on their high six and seven-figure incomes than someone earning $60,000 pays on theirs.   This could go a  long way to paying for universal healthcare, reducing the long-term structural deficit, and even paying for those wars Washington just can’t seem to let go of.

Why We Really Need to End the Empire: “We Can’t Cut Spending –”

Bruce Bartlett explains why a “balanced budget” for the US federal government is an impossibility.  Unfortunately, most people who strenously object to the deficit and want a balanced budget simply don’t understand the realities.  They often confuse “millions” and “billions” (it takes 1000 millions to equal a billion).  They further operate from greatly distorted ideas of just where the actual federal spending goes.

Domestic discretionary spending amounted to $485 billion last year. With a deficit last year of $459 billion, we would have had to abolish virtually every single domestic program to have achieved budget balance. That means every penny spent on housing, education, agriculture, highway construction and maintenance, border patrols, air traffic control, the FBI, and every other thing one can think of outside of national defense, Social Security and Medicare.

via We Can’t Cut Spending –