Mike the Mad Biologist

For most people reading this blog, especially the scientists, budgets matter. Not only is most of the cool science stuff you read about here funded by government funds, but, unless you’re independently wealthy, you’re going to need an uncut, untouched by Peter Peterson Social Security. Regarding budgets and deficit spending, we constantly hear about ‘responsible fiscal policy’–that is, we can’t engage in deficit spending (I’ve dealt with this silliness here and here). But political wishes notwithstanding, unless we want to reduce our savings (the stuff individuals and businesses own), we need deficits. This isn’t ideology or theory, but accounting:

Government deficits create non-government surpluses. It is a simple mathematical proposition; it is neither high theory, nor rocket science. If one sector spends more than it earns, another, by the rules of double-entry bookeeping, earns more than it spends. And so it is with the government–if it spends more than it collects in taxes, it runs a deficit, which is exactly equal to the surplus accumulated by the non-government sector. Deficits create income and profits for the private sector in excess of the taxes the private sector pays to the government.


Like I said, there’s a cost to deficit reduction:

If we demand that the government run a surplus, then we are demanding that we, the private sector, run a deficit. If we are demanding that the government pay off its entire debt, then we must be demanding that every single private portfolio, retirement account, or college fund sacrifice its Treasury securities. Surely the private sector does not want that. The government’s deficit is someone else’s surplus and the government’s debt is someone else’s asset….

Recall the Clinton surpluses. What was then considered to be a very ‘prudent’ government stance was in fact only possible because the private sector acted ‘imprudently’ and ran negative savings for many years…. Presumably, we’d prefer the private sector to save and accumulate financial assets, which means that the government must run a deficit and accumulate financial liabilities…. Because most people do not think about this basic accounting result, they tend to think that a responsible government is one that acts like a household, without recognizing that a ‘responsible’ government is possible only with an ‘irresponsible’ private sector behavior and vice versa.

Or as James Galbraith put it recently (italics mine):

So the public debt simply increases from one year to the next. In the entire history of the United States it has done so, with budget deficits and increased public debt on all but about six very short occasions–with each surplus followed by a recession. Far from being a burden, these debts are the foundation of economic growth. Bonds owed by the government yield net income to the private sector, unlike all purely private debts, which merely transfer income from one part of the private sector to another.

It’s a post-Bretton Woods, fiat currency world; we just live in it.

So does this mean we should just shut down the IRS, print an extra few trillion dollars, and hand out the money? No. What this means is that we have to recognize what ‘deficit reduction’ and ‘fiscal responsibility’ mean in the context of a suboptimal economy. It is a conscious decision, in the face of massive unemployment and underemployment, to prevent even modest inflation–which helps the wealthy with large amounts of dollar-denominated assets (e.g., T-bills and corporate bonds). Now, that is an ideological decision. That is a political decision (and, in my opinion, a stupid one). Conversely, increasing the deficit is a decision to help the unemployed (not to mention tighten labor markets which also helps the employed) at the expense of the wealthy. Personally, I would prefer a mixed strategy of wealth transfer (a more progressive income tax code, fewer deductions, higher capital gains tax, and a transaction tax) combined with some deficit spending.

This would reduce any effects of de facto asset depreciation for middle and upper-middle class families, while, at the same time lower the inflated prices of inelastic goods, such as housing and education. Regardless of one’s policy objectives, the point is that the deficit is an account balance. Whether or not it is a statement about the health of the economy depends on how we accumulate that deficit. Rebuilding our infrastructure, providing healthcare? Good actually. Giving wealthy people piles of cash that they either spend stupidly or invest speculatively? Not so good.

And keep in mind that the coming debate over ‘fiscal responsibility’ and deficit reduction (and mark my words, Obama will betray the Democratic rank-and-file on this too) is occurring entirely of an economy that is underperforming in that we have unmet needs (e.g., over a trillion dollars each to repair bridges and roads) and high levels of unemployment*. If we want to increase savings for all, including the middle and lower class, then deficits will have to be part of the foreseeable future.

One more thought (that might become a blog post!): while everyone gets hot and bothered about The Information Revolution That Will Change Everything, we, as a society, haven’t really come to grips with the changes in money–which is a pretty key innovation. Money isn’t what it used to be….

*As Atrios often quips, I’m old enough to remember when ten percent unemployment was a catastrophe. Apparently, it’s now the new normal.

Comments

  1. #1 Ken
    April 21, 2010

    Wow. I must have really missed the point of this article because youre pretty much saying that goverments should strive to always work at the edge of solvancy, so that any bump … such as banks being allowed to issue millions of mortgages to people who couldnt afford them, or such as China finally refusing to keep lending more to the US … throws the world into chaos.

    How deep is your credit card debt? You cant run it up forever without consequences.

    Canada is doing great right now, dodged the worst of the collapse because of years of surpluses and debt reduction. we had room to take the hit from the US financial insanity

  2. #2 william e emba
    April 21, 2010

    While teabagger ranting over deficit spending is incredibly ignorant, so too is this response.

    The economy as a whole does not follow the rules of double-entry bookkeeping. The economy is only partly money. It is also goods and services, people and firms. And since the latter are highly dynamic, so too should the money be dynamic.

    There is a time for deficit spending. Now is such a time: the private sector has spooked itself into not spending, creating an effective shortage of money and even more deflationary pressure, encouraging yet more non-spending.

  3. #3 william e emba
    April 21, 2010

    How deep is your credit card debt? You cant run it up forever without consequences.

    Sigh.

    Government debt is not the same as private debt. Presenting an argument as if it were is 100% rant. Got it? 100% content-free ignorant rant.

    Governments can legally do things that private citizens and firms cannot. They can print money. They can take money. They can welch. They can cheat.

  4. #4 Benedict@Large
    April 30, 2010

    Mike ~ I’ve been following along with interest as you’ve attempted to explain principles of modern money as they apply to the deficit, and mostly you’ve done a good job. I’ve had a nagging feeling you were missing something however, and now I see it: “… the point is that the deficit is an account balance.” Not really.

    The deficit is only an account balance if you believe that the US govenment “account” has a starting balance of zero. While this is true of private sector accounts, it is not true of the US government. With the government, the account balance starts at infinity, because this is the amount the government has to spend. (Not that it should; merely that it could.) Following from this, both adding to infinity (tax receipts) and subtracting from infinity (gov’t expenditures) have no meaning, and therefore the concept of the deficit itself has no meaning. Indeed, as you point out, it tells us nothing about the health of the government or the econ0my or whether to raise or lower taxes or whether to raise or lower expenditures. It tells us nothing.

    It is at this point where your Chicago School readers have a meltdown as their eyes roll up into the backs of their heads. “You’re saying all we have to do is [spend our way out of every problem/cut taxes to zero] … blah, blah, blah”. Of course modern money is NOT saying that, but by this time their defense mechanisms are running in high gear, and there is no more talking to them.

    Modern money doesn’t say you can spend forever or cut taxes to zero. There are reasons to stop spending just as there are reasons to tax. Those reasons simply have nothing to do with each other. THAT is the key insight of modern money.

  5. #5 Benedict@Large
    April 30, 2010

    @ Ken ~ Whether or not China ever loans us another dime, the US government’s ability to spend is unchanged. It’s our piggy-bank, and we get to say what’s in it. No, neither you nor I can spend unlimited amounts of money, but the government can. And it can also do so while controlling inflation. All of the economic tools are there to do this. Our only deficit is in political courage.

    @ William ~ “The economy as a whole does not follow the rules of double-entry bookkeeping.”

    What does this mean? Which goods and services cannot be represented in double-entry bookkeeping? We must have a very different definition of what the economy is.

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