A Cartoon by Ruben Bolling (via Economic Perspectives):
From politicalirony.com
Paul Krugman comments today on Modern Monetary Theory (MMT). Unfortunately, he gets it wrong. For example, he says:
Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency.
I wish I could agree with that view — and it’s not a fight I especially want, since the clear and present policy danger is from the deficit peacocks of the right. But for the record, it’s just not right.
The key thing to remember is that current conditions — lots of excess capacity in the economy, and a liquidity trap in which short-term government debt carries a roughly zero interest rate — won’t always prevail. As long as those conditions DO prevail, it doesn’t matter how much the Fed increases the monetary base, and it therefore doesn’t matter how much of the deficit is monetized. But this too shall pass, and when it does, things will be very different.
I commented and posted this response to him on his blog:
Paul, you either have an incomplete understanding of MMT or have setup a strawman. MMT does NOT hold that “deficits never matter, as long as you have your own currency.” MMT says that deficits do matter but only if (a) there’s no slack of real resources in the economy and (b) the private sector is choosing to net accumulate debt instead of accumulate net financial assets. In the meantime, however, as long the private sector wants to accumulate net financial assets, deficits are necessary to prevent Aggregate demand from falling.
You apparently prefer to use the interest rate on safe assets as the indicator of whether there’s slack real resources available – hence your emphasis on liquidity trap lingo. MMT emphasizes actual unemployment. If there’s significant unemployment, then there’s slack resources available for the government to purchase and put to use producing incomes for people.
A key insight of MMT is how the real world of banking has changed since the 1970′s when gold and fixed rates were abandoned. In our real world today, reserves do not constrain bank lending and money creation. The fears of inflation based on old equation of exchange theories are unfounded. It’s a shortage of real resources that will drive inflation, not deficits per se.
I’m not the expert on MMT. I’m just a teaching economist with both a lot of teaching and practical applied experience. If you really want to know MMT from the experts, try folks like Bill Mitchell and his Billy Blog, or Randy Wray and company at New Economic Perspectives. For that matter, read Wray’s books or Mitchell’s books.
A colleague asked for my thoughts on this article/column by Michael Manning in the State News, the Michigan State student newspaper, so I thought I’d post it for all.
Basically Mr. Manning reaches the right conclusions with a correct, but weak case. In looking at the issue of the size of the U.S. national debt and the panicked concerns many politicians are now expressing about the “urgent need to cut the deficit”, he concludes:
Republicans have decided to use this opportunity to further their party’s political agenda, feeding off of the public’s misunderstanding of national debt.
Although the debt is growing at an alarming rate, it does not mean the end of times or the end of American economic dominance. Public debt largely is misunderstood and used as a tool to scare everyday Americans.
He’s right. The debt is not the end of times nor will it end American economic prosperity (other policies may do that!). And he’s absolutely right that public debt is largely misunderstood.
But the arguments for why it’s not a crisis and how it’s misunderstood are even stronger than he argues. Essentially, Manning argues that most all of the debt is owed to “ourselves”, meaning either American citizens, American corporations/banks, or other units of government (Social Security program, The Federal Reserve, etc). That’s all true, but there are bigger reasons why the national debt doesn’t really matter.
He quotes Glenn Beck and then responds:
In the words of Glenn Beck, “China, some day, will want their payment, America. They will demand payment and they will receive their payment.
And if we can’t pay, they will do what any other bank would do, emotionlessly take the collateral that they now own. That will be our oil reserves, our land, our resources, our rare minerals, our coal, whatever it is.”
How much stake do these Chinese bankers actually have in America? They own a mere 7.5 percent, or about $1 trillion dollars of the national debt.
Yes, China only holds a small amount of the debt. But that’s not really why they won’t “repossess the collateral”. The reason China won’t foreclose on the U.S. more complex. First, Glenn Beck is absolutely ignorant. There is not “collateral” on government debt. The only security for the loan is the “full faith of the U.S. government”. In other words, if the U.S. didn’t want to pay, or if it wanted to payoff with new bonds, or if it wanted to payoff with newly created “money”, that’s their privilege. The lender knows that at the beginning. There is no international court of claims where one country can foreclose on another for a bad debt. What happens when a nation defaults on it’s debt? Basically the lenders (usually banks in other countries) get really upset. They stamp their feet. They call serious meetings. Serious communiques are issued. Foreign ministers get “concerned”. Then they re-write the debt and the lenders take a loss. Nothing else. Because it can’t! The idea of China “emotionlessly” claiming our “oil reserves, land, our resources,” etc. is absurd. How does Mr. Beck propose this happens? China just pulls a couple ships up to Texas, kicks everybody out and tows the state of Texas home to China? Or maybe China just moves in, digs up our coal and ships it home while everybody in West Virginia stands around? Or does Mr. Beck believe China will invade and forcibly take over (a nation with enough nuclear weapons to make dust of all us many times)? It’s ludicrous. I repeat. The government is NOT like a household, and that means there’s no analogy between holders of US debt and a car loan or mortgage you took from the bank.
But the national debt is more misunderstood than just this false household analogy. Indeed, it’s even misunderstood by many economists. The issue has to do with money. The U.S. government, being (1) a sovereign nation that creates it’s own money . that (2) borrows in it’s own currency and (3) has a fiat currency with floating exchange rate, means the government (federal) cannot go broke or ever not be able to pay back bonds and interest when they are due. This is because the government creates and is the source of the underlying “base money”. It can always create more money to pay the bonds when due. Now I know many folks, including many economists who haven’t updated their understanding of the monetary system since the 1971, will say “but, but, but that’s printing money and that creates inflation.”. No it isn’t. And no it doesn’t. The government doesn’t pay it’s bills or payoff bonds with “money”. They send checks drawn on The Federal Reserve Bank. Those checks are accepted by your local bank when you deposit them. When your local bank gives the check to The Fed, The Fed provides the bank with bank reserves. Bank reserves are not money. Bank reserves do not circulate. And, since 1971 at least, bank reserves do not limit or really influence how much money is in circulation. How much your local bank loans out creates money. And The Fed creates reserves to match what’s needed. (for a more in-depth explanations, see Bill Mitchell’s blog BillyBlog or the UMKC Economic Perspectives or this blog and search on “MMT”).
Now some, including many economists, claim that creating new bank reserves is inflationary. But this is based entirely on an outdated theory called the quantity theory of money which hasn’t proven useful, accurate, or valid for over 40 years, largely because it’s based on having a gold standard or fixed exchange rates (both of which Nixon abolished). Inflation happens when the nominal economy grows too fast and the central bank controls that through interest rates, not quantities of bank reserves or money. I realize that some of this may sound counter to what folks may find in a lot of econ 101 textbooks, but that’s because the textbooks really haven’t been updated to reflect modern monetary theory or modern central banking operations in the way they work since the end of fixed exchange rates and gold standard. In economics we have a problem with zombie ideas refusing to die.
Finally, there’s another very important reason the Chinese or anybody else that holds U.S. debt in large amounts don’t have a problem with the size of our debt. That’s because the “debt” itself, the bonds, really shouldn’t be thought of as “debt”. Government debt is really more like “paper money that pays interest”. Again this is sovereign national debt – see above conditions. If you are a state government or a nation like Greece or Ireland that foolishly gave away control of their currency to some foreign central bank, it’s different. That debt is really debt. But national, sovereign, floating exchange rate, government “debt”, the kind the U.S., Japan, Australia, U.K., Canada, and a host of other nations have isn’t really “debt”. It’s a form of interest-paying risk-free cash. It’s used by pension funds, banks, and investors as a risk-free asset. Indeed, at one point in the previous decade when Australia was actually paying down it’s debt and not issuing new bonds, the banking community persuaded the government to borrow anyway just so the bonds would exist.
So, Mr. Manning is correct, but he’s even more correct than he argued. The national debt is misunderstood. And a false crisis is being created in order to push an alternative agenda.
I’m noticing that the media is being somewhat slow to pickup on the real story happening in Wisconsin and not spreading to Indiana and Ohio. It’s not about fixing state deficits or finances. It’s about busting unions, pure and simple. As such, it’s part of an long-term effort that the right wing of American politics has been pursuing since the late 1960′s to increase the share of GDP that goes to profits and elite investors and to reduce the share of GDP/national income that goes to the middle class/working class.
Steven Pearlstein of the Washington Post is starting to get it, though:
The last time any elected leader made such a direct and brazen attack on the legitimacy of the union movement was when Ronald Reagan risked havoc in the skies by firing hundreds of striking air-traffic controllers and preventing them from ever getting their jobs back. This dramatic bit of union-busting became a turning point from which organized labor never really recovered – and, like the Wisconsin imbroglio, skillfully played off resentment of public employees whose pay and benefits exceed that of the average taxpayer.
But rather than playing Reagan to Wisconsin’s truant teachers, Walker overreached, refusing to give up his union-busting even after the unions agreed to his benefit-cutting demands. Now that he has allowed the unions to reframe the issue from one of greedy public servants to one of political revenge, Walker has single-handedly succeeded in bringing more attention, unity and sympathy to the union movement than it has had since . . . well, since Ronald Reagan took on the control tower. A mischievous columnist might even take this opportunity to speculate whether this is the beginning of the revival of labor’s fortunes
Pearlstein also observes how all the conservative talk about “running government like a business” is pure nonsense. No sane business leader interested in building a long-term successful business would approach workers this way, something I can attest to from my own corporate and consulting experiences:
Back when I was working at Inc. magazine in the mid-1980s, we loved nothing better when approaching a public-sector issue than to ask how the private sector would handle it. Faced with the situation in Wisconsin, we would have called up Tom Peters or Peter Drucker and posed the example of a new chief executive brought in by the shareholders (i.e., the voters) to rescue a company suffering from operating losses (budget deficit) and declining sales (jobs). Invariably, they would have recommended sitting down with employees, explaining the short-and long-term economic challenges and working with them to improve productivity and product quality in a way that benefits both shareholders and employees.
Now compare that with how Wisconsin’s new chief executive handled the situation: Impose an across-the-board pay cut and tell employees neither they nor their representative will ever again have a say in how things will be run or get a pay raise in excess of inflation. A great way to start things off with the staff, don’t you think? Remember that the next time you hear some Republican bellyaching at the Rotary lunch about why government should be run more like a business.
This situation, both the efforts to bust the unions and the protests, which started in Wisconsin but has spread will, I think be a major turning point in U.S. political economy. It’s too early to tell if which way things turn. It could spell a determined u-turn back to the early 20th century and worse working conditions and wages share of GDP/GNI, or it could be the beginning of the reversal of the 1970′s-1980 conservative revolution (is that an oxymoron?) and a return to progressive values. Too early to tell.
Kash at Streetlightblog and Angry Bear explains easily with one graph both how the federal budget got to be in such imbalance (deficit) relative to GDP and how insignificant the so-called “massive stimulus” was in 2009-10.
I think that when trying to understand the federal government’s fiscal situation, at least on the spending side, it is more informative to see how we got to where we are. We now have an on-budget (i.e. excluding the Social Security program, which continued to run a surplus in 2010) deficit of about 9% of GDP. In the early 2000s, the budget deficit was about 4-5% of GDP. That’s deterioration in the on-budget deficit of about 4-5% of GDP between 2003 and 2010.
Now take a look at the following chart, which shows federal spending on actual goods and services broken into two pieces: spending related to defense, and spending related to everything else. Then I’ve added federal spending on the two Meds: Medicare and Medicaid. (Note that this latter category is actually a transfer payment, not spending by the government on goods and services, since it takes the form of the government reimbursing individuals for medical spending that THEY have done.)
Defense spending has gone up about 2 percentage points since the early 2000s. Med+Med spending has gone up by about 2 percentage points since the early 2000s. All other federal spending has meandered feebly between 2% and 3% of GDP. That slight lift in the green line in the last two years is the “massive” stimulus, or put another way, what “out of control government spending” apparently looks like.If it weren’t for increased defense spending and the Meds over the past several years, the federal government’s budget balance would have been pretty close to unchanged. Despite the most severe economic downturn in 70 years.
I say again: what stimulus?
Brad DeLong is as puzzled as I, but is more eloquent in expressing it. In so doing he does my classes a favor in expressing a quick version of the history of addressing macro economic crises.
For nearly 200 years economists from John Stuart Mill through Walter Bagehot and John Maynard Keynes and Milton Friedman to Ben Bernanke have known that a depression caused by a financial panic is not properly treated by starving the economy of government purchases and of money. So why does “austerity” have such extraordinary purchase on the minds of North Atlantic politicians right now?
Let me speak as a card-carrying neoliberal, as a bipartisan technocrat, as a mainstream neoclassical macroeconomist–a student of Larry Summers and Peter Temin and Charlie Kindleberger and Barry Eichengreen and Olivier Blanchard and many others.
We put to one side issues of long-run economic growth and of income and wealth distribution, and narrow our focus to the business cycle–to these grand mal seizures of high unemployment that industrial market economies have been suffering from since at least 1825. Such episodes are bad for everybody–bad for workers who lose their jobs, bad for entrepreneurs and equity holders who lose their profits, bad for governments that lose their tax revenue, and bad for bondholders who see debts owed them go unpaid as a result of bankruptcy. Such episodes are best avoided.
From my perspective, the technocratic economists by 1829 had figured out why these semi-periodic grand mal seizures happened. In 1829 Jean-Baptiste Say published his Course Complet d’Economie Politique… in which he implicitly admitted that Thomas Robert Malthus had been at least partly right in his assertions that an economy could suffer from at least a temporary and disequliibrium “general glut” of commodities. In 1829 John Stuart Mill wrote that one of what was to appear as his Essays on Unsettled Questions in Political Economy in which he put his finger on the mechanism of depression.
Semi-periodically in market economies, wealth holders collectively come to the conclusion that their holdings of some kind or kinds of financial assets are too low. These financial assets can be cash money as a means of liquidity, or savings vehicles to carry purchasing power into the future (of which bonds and cash money are important components), or safe assets (of which, again, cash money and bonds of credit-worthy governments are key components)–whatever. Wealth holders collectively come to the conclusion that their holdings of some category of financial assets are too small. They thus cut back on their spending on currently-produced goods and services in an attempt to build up their asset holdings. This cutback creates deficient demand not just for one or a few categories of currently-produced goods and services but for pretty much all of them. Businesses seeing slack demand fire workers. And depression results.
What was not settled back in 1829 was what to do about this. Over the years since, mainstream technocratic economists have arrived at three sets of solutions:
- Don’t go there in the first place. Avoid whatever it is–whether an external drain under the gold standard or a collapse of long-term wealth as in the end of the dot-com bubble or a panicked flight to safety as in 2007-2008–that creates the shortage of and excess demand for financial assets.
- If you fail to avoid the problem, then have the government step in and spend on currently-produced goods and servicesin order to keep employment at its normal levels whenever the private sector cuts back on its spending.
- If you fail to avoid the problem, then have the government create and provide the financial assets that the private sector wants to hold in order to get the private sector to resume its spending on currently-produced goods and services.
There are a great many subtleties in how a government should attempt to do (1), (2), and (3). There is much to be said about when each is appropriate. There is a lot we need to learn about how attempts to carry out one of the three may interfere with or make impossible attempts to carry out the other branches of policy. But those are not our topics today.
Our topic today is that, somehow, all three are now off the table. There is right now in the North Atlantic no likelihood of reforms of Wall Street and Canary Wharf to accomplish (1) and diminish the likelihood and severity of a financial panic. There is right now in the North Atlantic no likelihood at all of (2): no political pressure to expand or even extend the anemic government-spending stimulus measures that have ben undertaken. And there is right now in the North Atlantic little likelihood of (3): the European Central Bank is actively looking for ways to shrink the supply of the financial assets it provides to the private sector, and the Federal Reserve is under pressure to do the same–both because of a claimed fear that further expansionary asset provision policies run the risk of igniting unwarranted inflation.
But there is no likelihood of unwarranted inflation that can be seen either in the tracks of price indexes or in the tracks of financial market readings of forecast expectations.
Nevertheless, you listen to the speeches of North Atlantic policymakers and you read the reports, and you hear things like:
“Obama said that just as people and companies have had to be cautious about spending, ‘government should have to tighten its belt as well…’”
Now there were—and perhaps there still are—people in the White House who took these lines out of speeches as fast as they could But the speechwriters keep putting them in, and President Obama keeps saying them, in all likelihood because he believes them.
And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, as a mainstream neoclassical economist. Right now the global market economy is suffering a grand mal seizure of high unemployment and slack demand. We know the cures–fiscal stimulus via more government spending, monetary stimulus via provision by central banks of the financial assets the private sector wants to hold, institutional reform to try once gain to curb the bankers’ tendency to indulge in speculative excess under control. Yet we are not doing any of them. Instead, we are calling for “austerity.”
John Maynard Keynes put it better than I can in talking about a similar current of thought back in the 1930s:
It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man’s speculative spirit. It would, they feel, be a victory for the Mammon of Unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy.
We need, they say, what they politely call a ‘prolonged liquidation’ to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.
I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity…
I do not understand it either. But many people do. And I do not understand why such people think as they do.
No do I understand why they think that way. But I suspect that it has to do with political and rich elites preferring to have a more dominant share of a smaller pie than to rationally wanting to share a larger one. As one of the commenters to Brad’s post put it:
We’ve been down this road before. “Auterity” is just a euphemism for getting the ignorant and foolish to support their own ruin in the name of wealth transference to the already wealthy by destroying government programs and services that benefit the middle class and needy.
Here’s a series of posts in the next couple days to try to help voters and everybody else cut through the nonsense, lies, garbage, and con games that has become American electoral campaigns – at least with respect to economics. A lot of electoral campaigns have increasingly come to resemble common con games such as 3-card monte.
A lot of candidates, in fact most of them, are claiming that it’s time for government to cut it’s deficit. Tip offs: These candidates claim loudly that “Washington (or spending) is out of control”. They claim that if we only elect them, “fiscal responsibility” will return. Don’t fall for it. It’s a con.
First off, cutting the deficit right now and making it a priority is the WRONG thing to do. It won’t help the economy. It will make things worse. Always does at a time like this with unemployment stuck near 10% and real growth at a crawl. Even the very conservative and austerity-favoring International Monetary Fund agrees, as Christina Romer notes in the NY Times:
Now is not the time. Unemployment is still near 10 percent in the United States and in Europe. Tax cuts and spending increases stimulate demand and raise output and employment; tax increases and spending cuts have the opposite effect. This is a basic message of macroeconomics and a central feature of public- and private-sector forecasting models. Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.
Some advocates of austerity argue that, contrary to the conventional view, fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth substantially.
The study considers a wide range of advanced economies over the last three decades, so it doesn’t put too much weight on unusual episodes or focus on examples supporting particular conclusions. It also breaks new ground by looking specifically at times when governments changed taxes or spending with the aim of reducing deficits. Previous studies looked at summary measures of the budget situation, and likely included cases when strong economic performance caused lower deficits, not the other way around.
The recent experience of countries already carrying out austerity measures is consistent with the central finding of the I.M.F. study. Ireland, Greece and Spain have all had rising unemployment after moving to cut deficits.
If you are worried about the deficit and want to see the government move toward a balanced budget, then growth and improved employment is the only proven way. Growth naturally leads to lower deficits as the automatic stabilizers (progressive tax rates, unemployment comp, etc) automatically cut spending and raise $ of taxes collected. Personally, I don’t think deficits are a problem anyway unless they are increasing when the economy is at full employment (see my posts on MMT here). But either way, increasing the deficit now will only make unemployment rise further and depress aggregate demand. Businesses do not hire and expand when the economy itself is not growing or looking to grow.
Candidates who claim they will cut spending never tell you how they plan to do it. They are full of talk about “detailed reviews” and “improved efficiency” and such. But they never tell you how or what programs will be cut. Government budgets aren’t secrets. They’re public information. If they can’t figure out even a few specifics in the two years that they’re campaigning, why in the world would you think they’ll find it on the job when they’r busier? The reality is they don’t intend to cut anything. At the federal level, they never do. They may privatize some functions so as to enrich cronies (while lowering services). At the state level, the only cuts they propose are those that they don’t dare mention before an election, such as cutting education, police, fire, highways.
Another trick they use is to count on voters not knowing the difference beween million (1 with 6 zeros), billion (1 with 9 zeros) and trillion (1 with 12 zeros). They may cite a few instances where the federal government apparently “wasted” 2-3 million dollars (although closer scrutiny rarely shows the waste) and claim that eliminating these items will save the hundreds of billions needed to balance the federal budget. The math just doesn’t work, but they count on you not being able to do 4th grade math.
Typically what such folks do once in office is to not “cut spending”, but rather to cut taxes. In particular, they cut taxes on high-income folks, capital income (as opposed to wage income), and business taxes. This, of course, only makes the deficit worse. They have a con game for that too, but that’s another post.
Again, there is no risk – none, zip, nada – of default by the US (or any other currency sovereign nation) on their government bonds. This does not mean that these governments can run unlimited deficits of unlimited amounts without any consequences. It means the consequences don’t include default on government bonds. If the government spending were truly too much, the consequence would be an overstimulated economy where aggregate demand exceeds available real resources. It does mean that the national debt does not ever have to be “paid off”. It also means that deficits now do not imply “higher taxes in the future”.
Today’s support comes from Bill Mitchell ‘s Billy Blog and Steven Major of the Financial Times.
In his FT article – ‘True sovereigns’ immune from eurozone contagion – HSBC economist Steven Major opens with the following statement:
There are plenty of doomsayers who think it is only a matter of time before the sovereign risk crisis spreads from the eurozone to other countries, including the US, UK and Japan.
This is not going to happen in my view. That is because the obsession with public debt ratios fails to distinguish between different levels of sovereignty. The US, UK and others can maintain high public debt ratios for longer, especially given the amount of deleveraging being carried out by the private sector.
Not all sovereigns are the same. The US, UK, Japan and Canada are examples of what I call “true sovereigns”. For these countries there is zero default risk. Investors should not worry about credit fundamentals, as they will always receive their coupons and original investment on redemption.
This is so contrary to what is being peddled each day in the financial press that a medal for bravery should be awarded. I just did that Steve(!)
…
Steven Major chooses to term a government in the former category a “true sovereign” because it:
… can issue freely in its own currency, has full taxing power over the population and ultimately, if required, can create more of its own money. None of this means that true sovereigns can afford to be profligate, far from it, but it does mean there is no externally imposed timetable on fiscal retrenchment.
I am 100 per cent in agreement with this construction.
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.
The US Government (and it’s budget) is NOT like a household or a corporation. Anybody who uses this time-worn analogy is simply not telling the truth and is likely either ignorant or is trying to pull the wool over your eyes. Randy Wray explains the many reasons. You (your household) must finance your spending (either use your income, sell your assets, or borrow). A corporation must do the same. A state government must do the same. The US Government (or any other sovereign national government with a non-convertible currency) does not. Modern banking and money simply don’t work that way. When sovereign governments DO try to balance their budgets but acting as if they have to finance spending, bad things happen. For the full impact, read past the “more”.
L. Randall Wray takes the fear and loathing out of understanding federal budget deficits.
Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences. Continue reading
