We Are Living Below Our Means, Not Above Them

A constant refrain one hears when the deficit hawks let loose their piteous cries is that we are living beyond our means. Surely, our budget deficit and national debt are signs of that.

Lord, for the sins which we have committed before thee...

Or not so much. As I've discussed before, public debt can lead to inflation when resources, human or physical, are limiting. And when resources are limiting, public deficit spending can also lead to misallocation of resources. But when they're not, we are simply holding ourselves back for want of currency. Millions of people are un- and underemployed based on a morality play (Lord, for the sins which....).

If we were on the gold standard--which we left in 1932--we would have a problem, as we would have to find more shiny lumps of metal. But with a fiat currency--the ability to simply print more money--we can dig up as much 'gold' as we need. Which brings me to Billy Mitchell, who in response to a puff piece by the NY Times' Gretchen Morgenson about Peter Peterson's Peterson Institute, notes the following (italics mine):

Another commentator - chose, lazily - to be the mouthpiece for the conservative lobby and wrote a book review that focused on the scary and exploding public debt levels. Apparently, this public debt tells us that the US is living beyond its means. Well, when I look at the data I see around 16 per cent of available labour idle in the US and capacity utilisation rates that are still very low. That tells me that there is a lot of "means" available to be called into production to generate incomes and prosperity. A national government doesn't really have any "means". It needs to spend to get hold [of] the means (production resources). Given the idle labour and low capacity utilisation rates the government in the US is clearly not spending enough. The US is currently living well below its means. But the US government can always buy any "means" that are available for sale in US dollars and if there is insufficient demand for these resources emanating from the non-government sector then the US government can bring those idle "means" into productive use any time it chooses.

Spending equals income. Someone has to spend for incomes to exist. For incomes to grow there has to be growth in spending. There are three sources of spending growth in a macroeconomy - the external sector (if net exports are positive); the private domestic sector; and the government sector (if the budget is in deficit).

That is indisputable. Economic growth is defined in terms of production and production only occurs if there are goods and services being purchased. Firms do not produce to hold inventory. Firms may invest in response to their guesses about future sales. These guesses will be heavily influenced by current consumer actions.

So when you get commentators and high-level monetary officials arguing that growth comes from not spending you have to ask why anyone would listen to their views and why they are paid to express them. I don't mind bloggers who do it for free saying what they like but when highly-paid and highly-visible express views that are not grounded in any economic theory that is comprehensible but nonetheless seek to influence the policy debate then I get angry.

If you wonder why this matters to scientists, remember that Senator Coburn framed his entire NSF-bashing report in terms of honoring 'fiscal responsibility.' Never mind that scientific research has an incredible stimulatory effect on the economy.

We are suffering from flat earth economics because too many of us think macroeconomics is a morality play, not a way to solve problems and understand the world around us. Which is kinda like creationism, when you think about it....

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