By Marshall Auerback, a portfolio strategist and hedge fund manager
For once, President Obama has sought to address his progressive critics, without caricaturing them as a bunch of out of touch, irresponsible radicals. At his press conference on Friday, the President made the following argument:
If you are a progressive, you should be concerned about debt and deficit just as much as if you’re a conservative. And the reason is because if the only thing we’re talking about over the next year, two years, five years is debt and deficits, then it’s very hard to start talking about how do we make investments in community colleges so that our kids are trained. How do we actually rebuild $2 trillion worth of crumbling infrastructure.
If you care about making investments in our kids, and making investments in our infrastructure, and making investments in basic research, then you should want our fiscal house in order so that every time we propose a new initiative, somebody doesn’t just throw up their hands and say “more big spending, more government.”
It would be very helpful for us to be able to say to the American people: “Our fiscal house is in order. So, now the question is, what should we be doing to win the future, and make ourselves more competitive, and create more jobs, and what aspects of what government’s doing are a waste, and we should eliminate.” And that’s the kind of debate that I’d like to have.
You want a debate on this, Mr. President? Consider it done. In a nutshell, your proposed cuts will NOT set the stage for a “progressive agenda” going forward. The austerity measures contemplated by your Administration will suck income and wealth out of the private sector. This will cause private spending to fall, leading to yet more downsizing and unemployment. Tax revenues will decline further as corporate profitability sags, social welfare expenditures will rise as the automatic stabilizers kick in. And before you know it, we’ll be bumping up against that troublesome debt ceiling again, experiencing the same kind of political grandstanding that is characterizing today’s conflict, sort of like a nightmare version of “Groundhog Day”. The government will, in effect, be chasing its own tail. You will not “put the nation’s fiscal house in order”, Mr. President, but tear down its foundations even further.
Democrats, like President Obama, persistent invoke the halcyon Clinton budget surpluses as some kind of Holy Grail for the country. But the mythical “virtue” of the Clinton budget surpluses is one of those unfortunate pieces of misinterpreted history that continues to afflict the Democrats in regard to their conduct of fiscal policy. Implicit in this argument is the belief that somehow balanced budgets are the norm, that President Clinton’s responsible stewardship righted the fiscal ship of state, after it has been left close to “insolvent” by the irresponsible legacy of Reagan’s supply-side economic adventurism.
Well, let’s look at the history first: for the past 82 years, the US government’s budget has been in deficit of varying proportions of GDP over 80 per cent of the time. There is nothing insidious or inherently sinister about these deficits. Each time the government tried to push its budget into surplus, a major recession followed which forced the budget via the automatic stabilizers back into deficit, ultimately helping to put a floor on demand and prevent a recurrence of the Great Depression.
All debt is not created equal. The expansion before the end of the Internet bubble crash in 2001, and the subsequent recovery in the 2001-2008 period (which had its roots in the housing bubble and massive financial fraud) were both largely products of an unprecedented private sector borrowing binge. Both businesses AND households borrowed (and spent) on an unprecedented scale. If a picture is worth a thousand words, then consider this chart, courtesy of Professor Scott Fullwiler
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During the Clinton years, everybody – Democrats and Republicans alike – applauded these surpluses because it meant that the government’s outstanding debt was being reduced. But Professor Fullwiler’s chart confirms that as the government budget moved to surplus during the latter years of the Clinton Presidency, the private sector’s deficit correspondingly grew larger: It was the mirror image to the budget surplus plus the current account deficit. In other words, this chart illustrates that the budget surplus meant by identity that the private sector was running a deficit.
Why is that? It is because budget surpluses suck income and wealth out of the private sector. As the budget surpluses grew, households and firms were going ever farther into debt, and they were losing their net wealth of government bonds. Even when the government went back into deficit, it was insufficient to offset the cumulative effect of huge private debt accumulation and rising trade deficits, both of which ultimately laid the foundations for the Great Financial Crash of 2008.
It is true that we could diminish our budget deficits via an improving trade account. But the trade option is highly problematic: It’s all very well to suggest that we should export more, but it takes two to tango, and if our trading partners (such as Germany, Japan or China) do not want to increase US imports, there’s very little the US can do. When I was living in Japan in the 1980s, this was a huge issue: the US tried to “force” Japan to revalue the yen (shades of China today), and pressured the Japanese into a whole host of liberalizing/deregulatory measures designed to increase US exports to Japan. Hardly any of them worked. Japan’s trade surpluses continued to expand.
There is also the issue of government restrictions at home. China would glad buy tons of our military hardware, but we restrict its sale on the grounds of national security. Since this is one of the areas where the US literally has a “cutting edge”, it makes export growth even more problematic.
Finally, you run into the old fallacy of composition argument: not every country can be a so-called “export superpower” as our President keeps urging on the US. As an example, consider Germany, which refuses to even run a current account deficit with its fellow European Union “partners” (even though this is arguably in Germany’s economic self-interest, as it would mitigate some of the strains currently being experienced in the euro zone periphery). Do we seriously expect the Germans to run big trade deficits with the US?
All things equal, then, leaves the government sector. Given our current account deficit (and the corresponding demand leakage) to sustain anything like the level of aggregate demand required to reduce unemployment, rebuild our infrastructure, etc., that means our budget deficit has to be even larger to allow our private sector to save.
To re-emphasize the point which the President should be making day in and day out: It was NOT “profligate” government expenditures that created the current fiscal state of affairs. To the extent that the US has experienced any “government profligacy” over the past 3 years, it is because of our mindless bailout of Wall Street institutions (and note how conspicuously quiet today’s fiscal hawks were during that period when the Treasury and Federal Reserve established trillions of dollars of financial guarantees to fundamentally insolvent banking institutions). The real issue is that those who are better off don’t want to have government intervention in economic affairs unless it benefits them. When the government intervenes with bailouts, Wall Street stands with hat in hand.
No one wants to bear the actual discipline of markets if that means losses. Those at the high end of income distribution aren’t against deficits when it suits them, but are frequently against it if that might make the workers stronger, or create competition for private businesses (in the case of a public option healthcare reform, for example).
Here’s the thing: deficits DO matter, but not in the way that is being formulated by President Obama. if a government spends too much after getting us to a state of full employment and higher economic growth, excessive government spending can create inflationary pressures. So to that extent, there is a limit. But acknowledging that unconstrained government spending can create inflation is not the same as arguing that it is in any way operationally constrained. Contrary to conventional “gold standard” thinking, where every dollar spent has to be ‘financed’ by an ounce of gold already in existence, our government can afford anything that it is for sale in its own currency (unless we artificially constrain ourselves via stupid self-imposed limits such as a debt ceiling – the US being the only sovereign issuer of its currency that chooses to constrain itself this way).
The debate that the President is calling for, then, should not be focused on “affordability” but on what constitutes the national priorities of our government. The political process, not a non-existent gold standard, or a foolishly imposed debt ceiling of questionable constitutionality, should determine our national priorities. Promising jam tomorrow in exchange for “eating our peas” today might make for a good sound bite, but it is predicated on a fundamentally flawed model. The whole basis of our growth over the past quarter century has been based on households borrowing and the continuation of negative saving trends. A good place to start recovery efforts, therefore, would be to change this method of economic growth toward restoring incomes and job growth, rather than propping up zombie banks and embracing “rentier economics” through this misconceived emphasis of public debt reduction. No ostensible progressive can achieve anything close to the objectives ostensibly desired by the President, if we embrace his flawed economic thinking. Concerns about government deficits and the government debt have served as a very useful way of masking the real issue, the unwillingness of conservatives to allow the government to work for the good of the population, something that a democratic government is supposed to do.
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” It is true that we could diminish our budget deficits via an improving trade account. But the trade option is highly problematic: It’s all very well to suggest that we should export more, but it takes two to tango, and if our trading partners (such as Germany, Japan or China) do not want to increase US imports, there’s very little the US can do. When I was living in Japan in the 1980s, this was a huge issue: the US tried to “force” Japan to revalue the yen (shades of China today), and pressured the Japanese into a whole host of liberalizing/deregulatory measures designed to increase US exports to Japan. Hardly any of them worked. Japan’s trade surpluses continued to expand.”
If we don’t balance our trade, then there is no long-term solution. Exporting $’s overseas to pay for our net imports and then borrowing them back CANNOT WORK FOREVER. It really is that simple. True if we don’t fix our trade imbalance and even run a balanced federal budget then we will not borrow the exported $’s back and we will get serious domestic inflation combined with very high FX devaluation as the $’s overseas continue to increase in supply.
“Exporting $’s overseas to pay for our net imports and then borrowing them back CANNOT WORK FOREVER.”
Of course it can. A Monetarily Sovereign nation ( http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ ), having the unlimited ability to create its sovereign currency, can send money overseas forever. As for borrowing, it’s totally unnecessary, a relic of the gold standard days.
Rodger Malcolm Mitchell
Sorry, we will get serious domestic DEFLATION (particularly in assets)
“It is true that we could diminish our budget deficits via an improving trade account.”
The US can’t and remain the world’s reserve currency.
If people are hoarding US dollars as a back stop, then by definition they are not buying US export products.
And that’s before you get to the systematic hoarding by governments to prop up their export markets.
“Exporting $’s overseas to pay for our net imports and then borrowing them back CANNOT WORK FOREVER”
Yes it can. There is an infinite supply of $’s if the US would only realise that.
“then we will not borrow the exported $’s backand we will get serious domestic inflation combined with very high FX devaluation as the $’s overseas continue to increase in supply.”
You don’t borrow the $’s back, you offer saving bonds for foreigners. Stop issuing the bonds and little will happen in reality. QE effectively did that and the dollar exchange rate went up. So your assertion is based on false intuition, not hard data.
Saved $’s are inert. Only those in flow cause transactions and alterations to rates. So its not the total dollars that matter, its the total dollars currently being spent.
cut military spending, end all the wars including the one on drugs, tax high wealth be it personal or corporate and re-regulate all industries to the extent necessary to make them responsive to the greater social good rather than profit.
So are those things I mentioned not progressive or are we changing the goal posts again?
This is just more example of propaganda that is limiting the discussion of alternative futures.
Amen. The fact that he mentions exporting arms and doesn’t even say that such exports cause more medium/long-term problems didn’t make me think highly of his reasoning skills. His discussion doesn’t seem to open up the possiblities of what government can (and shouldn’t) do.
It is true that we could diminish our budget deficits via an improving trade account. But the trade option is highly problematic…
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If it’s difficult, we should give up?
If we shouldn’t give up and if we could somehow find ways to improve our trade accout (leading to diminished budget deficits), it sounds like, then, that diminishing our budget deficits is a goal…something desirable.
Today, reducing budget deficits has no economic purpose. A Monetarily Sovereign nation ( http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ ) can create its sovereign currency forever, limited only by inflation.
The current focus on deficits is incredibly misguided. Deficits add money to the economy. Money is the lifeblood of an economy. Cutting deficits is like applying leaches to cure anemia.
Those who do not understand Monetary Sovereignty do not understand economics.
Rodger Malcolm Mitchell
Maybe I am not reading it correctly, but Marshall is making it look like he would think about deficit reduction but for its being problematic.
I should say Marshall’s definition of problematic is Japan putting up obstacles.
Why does Japan want a surplus trade account?
Wouldn’t that diminish their budget deficits?
If Japan shrinks their trade account, would that allow them to run higher budget deficits so they can further stimulate their economy?
It seems like a fallacy of composition if all governments desire budget deficits at the same time, much like if each nations wants to be an export superpower.
Mr. Auerback:
Isn’t it true that if the US were to become an exporting superpower it would impoverish the workers by cutting our wages and benefits?
Don’t you agree that people who are constantly calling for less imports are actually hurting the people in the US?
Are not politicains who want to rely on exports making a grave mistake?
“The austerity measures contemplated by your Administration will suck income and wealth out of the private sector.”
LOL!!! Austerity?!?! What, going back to deficits of 8% of GDP would be austerity? HAHAHAHA!!!
Next, government spending requires investment from the private sector (Treasury bills/bonds) that theoretically could go into other investments, such as corporate bonds for that paper company to add a new factory (here in the US) without which, the expenditures would be outsourced to foreign companies.
Something tells me the portfolio manager has a vested interest in neocon/war mongering pork.
Not sure about the interpretation of Prof Fulwillers chart… or are my eyes going
1. …if the only thing we’re talking about over the next year, two years, five years is debt and deficits, then it’s very hard to…
The only reason we’re talking about it is because he’s the one always driving the “discussion” to that subject.
If the POTUS insisted that the discussion be about jobs creation, deficits be damned (and not talked about), that’s what the political/media discussion would be.
2. If anyone truly cared about the deficit and the debt and wanted to cut spending based on such concerns, he’d start with the Bailout, the war, weapons spending, the police/prison state, Big Ag subsidies, and all other corporate welfare.
The fact that no one who claims to care about this issue wants to start with corporate welfare, but goes right to wanting to gut what little public interest spending is left, proves that no one really cares about it. It proves they’re only using it as a pretext to attack the public interest programs.
And I refuse to include entitlements within any category which is touchable even in principle, since we the people have directly paid for those programs with dedicated taxes. I won’t listen to anyone who participated in embezzling those funds for other spending (or supported those who did) and who now wants to turn around and say those programs are debt-drivers which need to be cut.
3. From the point of view of the people, it seems to me that it’s a waste of time arguing about deficits and debt. It’s a stupid elitist kabuki. Why fight on their turf?
Let’s focus on two things: 1. That they’re going to try to gut SS and Medicare, 2. That they’re going to try to impose even more regressive taxes upon the non-rich.
Let’s therefore distill the political stance on this to two simple, non-negotiable positions:
1. Absolutely no cuts to SS and Medicare. They’re perfectly solvent. They’re not part of the deficit. We the people already paid for them. To even suggest compromising them is to advocate robbery plain and simple.
2. No Taxes on the Non-Rich. We must constantly demand cutting the taxes on us that already exist, and ferociously attack anyone who advocates one cent of new taxes upon us.
The fact is that government no longer does anything but assault us on behalf of corporations and the rich. Every cent it extracts from us is not only a much-needed cent lost to us, but a cent which will be handed over to our enemies and used to further rob and kill us.
(I’m perfectly aware that #2, if successfully carried out, would change the truth of #1. So what?)
I am currently writing from Europe, after a six weeks stint doing some work in Hamburg. That the Eurocrisis is happening in lock step with the “debt-ceiling crisis” and the ONLY policies being pushed on both sides of the Atlantic is telling. The odor of coordination is too strong to ignore. Obama is naturally thinking about trying to win the Tea Party vote in 2012 (snort!). But, CLEARLY he is also doing the bidding of the rentier class, who he has always represented.
As an aside, a German colleague ran into an American colleague at an academic conference in Sweden about a month ago. This mindless boob (the American) told my German friend that, although she, an African-American, is disappointed with Obama’s first term, nothing to fear, once he is re-elected, the real prpgressive policies will be forthcoming. That Obama still holds the support of academics like this woman is galling. And, also why we have such a stupidly narrow political discourse at this late stage of this man’s pathetic administration.
During the Clinton years, everybody – Democrats and Republicans alike – applauded these surpluses because it meant that the government’s outstanding debt was being reduced.
The author is wrong about this which also calls into question his premise that when government debt is decreased, consumer debt rises.
According to the Treasury Dept., the national debt has increased every year for over 50 years. There has been no reduction in the outstanding debt since 1957.
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm
Government debt is inflationary and an ever-increasing debt requires an ever-increasing amount of interest to be paid on that debt. As the value of the dollar decreases, interest rates tend to rise and prices rise in relation to the dollar.
As more and more tax money is used to pay interest on the debt, less and less can be spent on government programs so dear to progressives and conservatives alike – less welfare and less warfare. This is exacerbated by rising prices.
The simple reality is that government cannot spend or borrow its way out of debt without creating inflation which hits low-income consumers the hardest.
Another way to hit low-income consumers is to raise corporate taxes which are passed on to consumers through higher prices. America might do well to eliminate corporate taxes altogether as the mega-corporations have already lobbied their way out of taxation, leaving small decentralized business less able to compete both locally and internationally.
The bottom line is that there really is no such thing as a free lunch. Divide the federal budget by the number of Americans and you’ll find the budget comes out to about $10,000 for each man, woman and child in America, and rising. This is truly not sustainable and contributes to the increases in consumer debt as the middle-class struggles to maintain the lifestyle they have come to expect.
Meanwhile, there are entirely too many people who produce nothing and earn big bucks by merely shuffling papers on Wall Street or in Washington managing the welfare/warfare state for the ruling elite – which includes “progressives” and “conservatives”. Is there any difference other than rhetoric and a few percentage points in spending priorities?
Good arguments. The low income members of society, assuming that they are wage earners, will be seriously affected by inflation (money devaluation) when they try to buy food, fuel, housing and health care. Don’t forget that the middle income members will find that the value of any of their dollar denominated savings will be siphoned away at the same time as their expenses are increasing too. Only the very well off will be mostly indifferent to the devaluation of the currency since they have many more options available to them to protect their wealth.
“The author is wrong about this which also calls into question his premise that when government debt is decreased, consumer debt rises.”
Publicly held debt did in fact decrease- use this tool: http://www.treasurydirect.gov/NP/NPGateway . Overall debt increased though due to intragovt holdings (ie the govt paying itself). It doesn’t matter though, the historical anecdote is irrelevant to the pure economic concepts at hand, which are indisputable accounting identities.
“Government debt is inflationary and an ever-increasing debt requires an ever-increasing amount of interest to be paid on that debt. As the value of the dollar decreases, interest rates tend to rise and prices rise in relation to the dollar.”
If you are a bit more precise, I can agree with you. The way I would say it is that deficit spending and the interest associated with the debt that is issued along with deficit spending has the potential to be inflationary since these operations add net financial assets to the economy (whereas taxing has the potential to be deflationary since it is destroying net financial assets). However, demand-pull inflation from govt spending/interest payments logically requires the economy to be at full capacity (ie more money chasing the same amount of goods- ECON 101); however, today’s situation is a perfect example where govt spending is not likely to be inflationary since we are currently facing an ENORMOUS output gap with 9%+ unemployment. When the economy recovers and nears full capacity- then yes, govt spending threatens inflation.
“As more and more tax money is used to pay interest on the debt, less and less can be spent on government programs so dear to progressives and conservatives alike – less welfare and less warfare. This is exacerbated by rising prices.”
The more precise way to say this is less and less can be spent if the barrier is to avoid inflation once full capacity is achieved. But generally I agree- but we must be at full capacity before rising prices occur due to demand-pull inflation.
“The simple reality is that government cannot spend or borrow its way out of debt without creating inflation which hits low-income consumers the hardest.”
False- you need more money chasing more goods. So it’s all situation dependent. And the govt doesn’t spend it’s way out of debt as you suggest. The govt just spends. Tax cuts and/or deficit spending in today’s environment will add aggregate demand that today is NOT coming from the private sector; this will boost employment and correspondingly LOWER govt spending through automatic stabilizers. So in this sense the govt can spend/lower taxes its way out of deficits and debt.
“Another way to hit low-income consumers is to raise corporate taxes which are passed on to consumers through higher prices. America might do well to eliminate corporate taxes altogether as the mega-corporations have already lobbied their way out of taxation, leaving small decentralized business less able to compete both locally and internationally.”
Agreed higher taxes is not what we need now. Lower taxes or more deficit spending- it’s a political choice. I would focus tax cuts on those that directly hit consumers though (like FICA).
“The bottom line is that there really is no such thing as a free lunch. Divide the federal budget by the number of Americans and you’ll find the budget comes out to about $10,000 for each man, woman and child in America, and rising. This is truly not sustainable and contributes to the increases in consumer debt as the middle-class struggles to maintain the lifestyle they have come to expect.”
Completely false. Public and private debt is an entirely different concept. When the govt runs a deficit (either through spending or tax cuts), that directly puts more income in the hands of Americans, which deleverages their balance sheets. Law requires the Treasury to issue public debt to match deficit spending- it is just a record of net financial savings (plus the interest- which as you note as the potential to be inflationary depending on the economic situation). This is the whole point of the argument- deficit spending in TODAY’s environment allows for deleveraging of private balance sheets; sucking financial assets out of the economy via surplus will cause re-leveraging unless it is offset by our trade balance, which is highly unlikely.
“Meanwhile, there are entirely too many people who produce nothing and earn big bucks by merely shuffling papers on Wall Street or in Washington managing the welfare/warfare state for the ruling elite – which includes “progressives” and “conservatives”. Is there any difference other than rhetoric and a few percentage points in spending priorities?”
I can sympathize.
Total debt at the end of 2000 was lower than at the end of 1999. There were a few other periods in the late 1990s that it decreased. http://research.stlouisfed.org/fred2/data/GFDEBTN.txt
But a surplus/deficit is about the debt held by the non-govt sector. That is the only sector the govt pays actual interest to. All other debt is an intragovernmental payment, like owing allowance to your children. That number did decrease by about $600B during the late 1990s into 2000. http://research.stlouisfed.org/fred2/data/FDHBPIN.txt
Nice data sets! I will keep those in mind.
Funny- data isn’t it? You look at a November MAT, and it shows one thing. You look at a March MAT, and it shows another :).
“But acknowledging that unconstrained government spending can create inflation is not the same as arguing that it is in any way operationally constrained. Contrary to conventional “gold standard” thinking, where every dollar spent has to be ‘financed’ by an ounce of gold already in existence, our government can afford anything that it is for sale in its own currency.”
My question is:
Why do MMT’ers dance so obliquely around the issues of Fed independence and institutional separation?
The fact is that these constraints exist, and you can’t deny they exist.
And you can’t implement anything MMT wants, unless you gain the broad ideological support required to get rid of them.
Yet you avoid this real battle for institutional reform.
Instead, you continue to deny that they exist, effectively, which is a total logical contradiction. It’s as if you want to convince the masses that they are a mirage, and that in the MMT world of MMT reality, they really don’t exist.
But they do. And MMT won’t be relevant until you focus on getting rid of them.
No one dances around the “Fed independence and institutional separation”. Those are political constraints, MMT describes the operational functions of our current monetary system.
Before you can advocate for change, you need to have some alignment around how things function, otherwise there will be little support for new policies.
For example, the arguments for cutting Social Security revolve around “solvency” issues that do not exist. If people understood that, the discussion could revolve around issues of equity and forecasts of real resource constraints.
It is important to understand the operational functions in our current monetary apparatus and to separate the political from the structural.
The deficit is really a score sheet that reflects the state of the economy (the balance between consumption and production). Subsets of production are the import-export of goods, services and money. A subset of consumption are the “parasites” (unearned consumption, unemployed, the useless mouth) and the parasites of production (the rentier, usurer).
An important process is the conversion of production output to those that consume. Generally, society is driven by the engine of the worker, the wage earner, the wealth of nations. If that conversion from production to wages is defective, you begin accumulating a deficit. Taxation is a tool used to transfer surplus wealth to wages or to encourage investment into wage creation production.
It has become fashionable to transfer wealth internally or to import wealth, resulting in accumulations that are not injected into wage producing activities. Wealth disparity has negative consequences that includes a deficit increase. If you want to actively decrease the deficit by decreasing government activity, then there better be jobs available for those workers.
We may have too much capital in the system and it encourages mis-allocation schemes. Mis-allocation of capital has a similar effect (a tax) on the workers as does inflation without the benefit of an eventual wage increase. The wealthy want low taxes, so they can tax the worker (card swipe fees, high interest revolving credit, infrastructure sales). Our system can not support the parasite load, hence the deficit. The parasites find money by attacking government spending and lowering the standard of living of the worker. The deferred savings and safety-net programs of the government prevents the mis-allocation of capital, an unrealized benefit. We should discourage the formation of large pools of capital because in many ways they are destructive.
Excellent Ransome. I believe these mis-allocation schemes are also called bubbles.
I really don’t understand why a deficit spending entails private sector savings, and vice versa. Could someone explain it to me?
Sauron, I would suggest you google Bill Mitchell on Bilbo blog… He has an excellent set of posts on why government spending equals income for the private sector, and why government surpluses means a reduction of net income for the private sector. The general term for this phenomenom is ‘Sectorial Balances’.
Edward Harrison also has some good posts on the subject.
It was a major ‘eye opener’ for me.
It’s immoral for the federal government not to make everyone in the public sector, where no one has any money problems.
They can set up dummy corporations for a fictious private sector the handle all the ‘savings.’
Federal spending adds money to the economy. Federal taxing removes money from the economy. Money in the economy = savings.
Rodger Malcolm Mitchell
Why does federal spending equal private savings?
Think about what the government spends money on. Most of it isn’t funneled overseas or anything; it either gives people money or it buys stuff from them. If the government buys $1B worth of explodey things from Lockheed-Martin, suddenly the private sector has a lot of extra money. Lockheed can either save that money itself, or pay it to employees and investors, who then save it, or spend it on other goods, whose sellers save it, etc — ultimately it’ll flow to a bank somewhere.
Same deal with transfer payments — if the government sends Grandma a SS check, she either saves it, or (more likely) spends it on stuff she needs, whose sellers then eventually save it. When the government spends, the people eventually get to keep the money — there’s nowhere else for it to go.
On the other hand, if the government tries to save money, the money has to come from somewhere — it has to be soaked out of the economy, pulled away from private citizens. When the government saves out of tax receipts, the people must borrow (or draw down their own savings, which is basically the same thing), because there’s nowhere else for the money to come from.
An aside on the idea that government spending causes inflation — many people are concerned that the government creating more dollars would result in inflation. They’re thinking of the simplest definition of inflation there is, something like total goods divided by total dollars equals value of a dollar. If you increase the number of dollars, that’d seem to be inflationary — except that when there’s unemployment, government spending is going to be putting people to work, which increases the top part of that fraction. Ex the government expenditure, those billion dollars of Lockheed bombs would never get made. So yes, the number of dollars has gone up by a billion — but the amount of goods produced has gone up by a billion dollars’ worth, too, and it’s a wash. The only time that doesn’t hold is when the economy literally cannot make anything more, so that the government creates a billion new dollars and has to spend them on less than a billion worth of goods (because of, basically, bidding wars between the government and whoever else wanted to buy that labor or saltpeter or aluminum or whatever). That only happens when the economy is at full capacity. Right now, it certainly ain’t.
Borrowing and drawing down savings are *intensely* different operations. They are not the same at all.
The key here is that if the government saves out of taxes on the *rich*, then the *rich* draw down their savings, which may be beneficial (preventing them from buying Congressmen, and putting government back in control of the money supply rather than letting them pull it in and out of use as they desire).
If the government saves out of taxes on the *poor*, then the *poor* borrow, with completely different economic effects; they end up spending less on other things (useful things like food) with disastrous economic effects, and they end up funnelling money in interest to lenders, i.e. the rich, thus creating all the problems which are caused by excessive concentration of wealth (purchase of Congressmen, etc.)
So the key issue with regard to taxes is *who they are on*. Taxes are about redistribution. And if you’re transferring from the poor to the rich, you’re doing it wrong, because you will damage the economy *and* give the rich the power to damage the political system. So transfer it from the rich to the poor.
“The wealthy want low taxes . . . “
Everyone wants low taxes, and rightly so. Federal taxes have no economic benefit other than inflation prevention. The federal government neither needs nor uses tax money, which actually is destroyed upon receipt.
If all federal taxes fell to $0 or rose to $100 trillion, neither event would affect the ability of the federal government to pay its bills. Contrary to popular belief, taxpayers do not pay for federal spending.
Because federal taxes remove money from the economy, all taxes — on the rich and on the poor — hurt economic growth. Therefore, all taxes hurt the poor, even taxes on the rich.
Again, contrary to popular belief, the tax money paid by the rich does not go to the poor. Federal social programs are not supported by federal taxes (though state and local programs are). FICA does not support Social Security.
In short, in a Monetarily Sovereign nation ( http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ ), federal spending is not supported by federal taxes.
Those who do not understand Monetary Sovereignty do not understand economics.
Rodger Malcolm Mitchell
Federal taxes have no economic benefit other than inflation prevention
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Interesting.
First of all, I thought people were the sovereign.
The question I have is this: What is to prevent everyone from wanting to be in the public sector, where one can spend to one’s delight?
Why not make everyone the public sector (if they haven’t ‘volunteered’ already)?
Which dunce wants to be in the private sector where you don’t get to party but if there is an inflation problem, you, Mr. Private Sector, get the priveledge to be taxed? Hey, you’re the sovereign. The public sector, that’s me, only works for you here. Don’t ask me for taxes.
“I thought the people were the sovereign.”
Not when it comes to money. The government can print money at will, legally. When citizens do this it’s called counterfeiting and it ultimately results in tense conversations with men in dark suits.
For the rest, what you’re saying doesn’t make sense. People cannot “be in” the public sector or the private sector. People are simply people. Some of their money comes (proximately) from the government, whether through cash transfers or government purchases; some of it comes from acts of capitalism between consenting adults.
In such a system, taxation is used both to shape behavior incentives (carbon tax) and to reduce private consumption when the government has something that needs to get done and the economy is running tight and hot. You can do this perfectly well with a sales tax that discourages private consumption; people don’t actually have to have their dollars taken away, so long as they aren’t consuming real resources (and thus providing enough slack for the government to spend what it needs without starting a bidding war over labor). Or you can just print ration coupons so the meat goes to the troops; whatever. It doesn’t have to be wicked Uncle Boogeysam stealing your gold.
Actually that’s not a bad idea. I think it used to be called “the commons”. We the people don’t have to be like the communists and wear the same shoes so not everything is public. But we the people should control the money system by sticking the Fed under Treasury. We then put 2.2 Trillion in notes into the economy to fix our infrastructure. We pay no interest to private bankers on this money. Banks will then return to being just a way of keeping money in vaults and lending at no more than 9% with 100% reserves. They are not allowed to create debt.
Interesting post, but you exclude taxes on undesirable things like carbon taxes and land taxes (which are taxes on rent; vital to keep rentiers at bay. That explains why we don’t have them).
You fail to understand the crucial redistributive nature of taxation.
Currently, federal taxes are higher on the middle class and the poor than on the rich. The spending also goes disproportionately to the rich, and very little to the poor (though there is all that money paying enlisted men and women in the military). So it’s redistributing the “wrong way”, from poor to rich.
But in the past, federal taxes HAVE been redistributing money from rich to poor, and they ought to, if only to break up the wealth of the people who are powerful enough to buy Congress.
Don’t forget what happened last time there was a surplus. Taxes were cut and the deficit reappeared. Whereby republicans screamed gut the govt. He is so full of it. We have been asking for those things for the last 20 years, even during good times. Never were those things given because of the evil of govt spending. And look deeper at some of his lesser policy ideas, NASA being the big one. He totally encourages the private sector to do those things, just like a Reagan republican.
“For once, President Obama has sought to address his progressive critics, without caricaturing them as a bunch of out of touch, irresponsible radicals.”
How true, he was addressing them much more as nitwit rubes who could be easily snowed, which given their ongoing support of him, despite any misgivings, seems like a perfectly reasonably strategy.
Those who do not understand Politics do not understand reality.
What’s nauseating about this little prick’s speech is the line about providing community colleges for kids so they can be “trained” obviously subscribing full on to the elitist notion that the children of the working classes don’t need an education that will enrich their lives, but they need job training to enrich the lives of their employers.
Fuck you, Barry.
Does anyone feel like this is Bush’s Iraqi War talk all over? We have to do something because if we don’t, we’re going down kinda talk?
In this case, Obama is holding the economy hostage over budget cuts. In Bush’s case, he was holding the country’s security hostage over Saddam/WMDS/link to Al Qaeda.
This budget cuts are going to make things here in the US get ugly, really ugly.
Recession/Depression here we come again.
The virtue of the Clinton surpluses was entirely Keynesian: they were sucking money out of the economy during a bubble, which is a good thing to do.
Of course, Bush reversed that policy, allowing the bubble to get bigger and bigger until it blew up. :-P
Anyway, the only point to running a government surplus is to try to burst an economic bubble. The ONLY point.