Deficits Do Matter, But Not the Way You Think

[jtuck004]

Do we use our position as the monopoly provider of the dollar and manage our deficit to the benefit of our country and the 30 million unemployed or underemployed people (a number that is likely to increase over the next year) who should be working full-time, paying taxes, and helping us fund other jobs? Or do we cower under the sheets in fear of the ghosts of our own past learning about money rattling chains at us?

Budget deficits and government spending are necessary to end today’s crisis.

In recent months, a form of mass hysteria has swept the country as fear of “unsustainable” budget deficits replaced the earlier concern about the financial crisis, job loss, and collapsing home prices. What is most troubling is that this shift in focus comes even as the government’s stimulus package winds down and as its temporary hires for the census are let go. Worse, the economy is still — likely — years away from a full recovery.
...
There is an alternative view propounded by economists following what has been called “Modern Money Theory”, which emphasizes the difference between a currency-issuing sovereign government and currency users (households, firms, and nonsovereign governments)
...

If we can get beyond the fears of national insolvency then there are many issues that can be fruitfully discussed. While inflation will not be a problem for many years, price pressures could return some day. Impacts of exchange rate instability are important, at least for some nations. Uemployment is a chronic problem, even at business cycle peaks. Aging does raise serious questions about allocation of resources, especially medical care. Poverty and homelessness exist in the midst of relative abundance. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to resolve. We may well need more government spending, and, yes, even budget deficits to tackle some of those problems.

So, yes, deficits do matter, but not for solvency.

L. Randall Wray is Professor of Economics at the University of Missouri-Kansas City.

More here...


"A mind that is stretched by a new experience
can never go back to its old dimensions."
— Oliver Wendell Holmes: American writer and Professor at Harvard, 1809-1894

[OllieLotte]

1. News flash cupcake...what we are doing isn't working.

That idea is slowly sinking in with the rest of the country. I suspect that a year from now, when we still are at 10% unemployment, you too will have your doubts.

[jtuck004]

2. ? You do understand that is exactly what he is saying?

The current administration, the deficit commission, most of the congress, lots and lots of Wall Street Folks trying to sell you stock -

ALL consistently frame their arguments that we cannot do a stimulus or jobs package because we have to borrow. Yet, clearly, with a sovereign currency, we don't.

One of my former posts says not only do we have 31 million people unemployed or underemployed, that there is a better than even chance that we are going to see higher unemployment next year, and that unless something changes we may well not get under 8% until 202.

And the idea is not sinking in nearly fast enough. When they unemployment extension runs out in November, we will lose, (As we have for the past two months) about $3 billion that is spent directly into the economy. Merry Christmas...

Or perhaps you meant to answer another post?

[FBaggins]

3. No... it really isn't.

You're acting as if the current plan is one of austerity when we have had massive stimulus spending.

The author's position isn't that more of the same won't work... it's that we need LOTS more of the same. He may or may not be correct, but he's certainly not saying the same thing that the poster you responded to appears to be saying.

[girl gone mad]

4. We haven't had massive stimulus spending.

We had a massive bank bail out, but the stimulus was puny by comparison, and poorly allocated, too.

[jtuck004]

5. In some minds, perhaps. But when you compare the investment

and recovery act dollars, nominally worth $787 billion, with the amount set aside for the alphabet soup of programs to prop up Wall Street at $14 trillion, which is continuing, while the ARRA is winding down, it doesn't seem so massive. It seems cynical and cruel. Especially since Wall Street is telling people earnings are good, and that a great strategy is to work with American companies whose profits are quite good _outside) of this country.

And I don't think we have seen "austerity" yet - but I do believe it is going to be proposed.

And I suspect the people who can't feed their kids or are losing their homes because of the inaction of the administration
don't feel like it's so damn "massive".

[FBaggins]

6. Not "in some minds" - in reality.

One can fairly argue whether the money has been well-directed (it hasn't), or whether other expenditures have been larger (they have)... but not that a large amount of stimulus money has been spent.

Which isn't really relevant in this case, because my point was that the poster was saying that so much had been spent and we can't keep it up much longer... while the author you cite is saying almost the opposite (that much more can be spent). I wasn't so much saying that one was right and the other was wrong... but rather disagreeing with you that they were saying the same thing. They weren't.

I will make two points however:

1) There is such a thing as a limit on how much can be spent through borrowing before the stimulative impact is not worth it because of massive debt. It's fair to argue that a large portion of the new debt in the last few years SHOULD have been "spent" more effectively, but it doesn't change the fact that it has been spent.

It's like saying that it's reasonable for you to finance a new car purchase (in the abstract) after someone tells you that you can't afford it because you just borrowed $100k to go on vacation and put on a really great 4th of July fireworks show. You can't just say "well that money should never have been wasted that way"... it's gone and now you can't afford the new car even if it was the smarter idea.

2) The people who made the poor choices with the other debt (Congress) will be the same people (or worse) who blew the earlier attempts at stimulus. Even if it can be argued that real stimulus is needed and the economy can withstand the added debt... who will trust them with the keys to the new car this time?

[jtuck004]

7. ok, i'll give you the first one and get to the important stuff.

1 - Nobody has ever reasonably argued that there are no limits on investing (inflation, etc), except where their writing was careless or misinterpreted. The argument is that we are in such serious trouble that we cannot afford not to, and the potential problems that might result from over-investing are just that - only potential. They are nonexistent today, and certainly years away, and will be mitigated by the trillion-plus in revenue we will gain when we see full employment again.

If we don't invest we will watch people who are unemployed NEVER get employed again. We will watch business slowly but surely move their spending into economies outside of this country where they are investing large money (for example, China) to make their economy stronger. We will watch our economy slowly but surely die, and while it remains in this state is will be extremely vulnerable to any single major disaster, and may then collapse. Business isn't going to invest. First, there is no demand, so there is no reason for them to increase capacity. Second, and generally speaking, no smart businessperson would invest into this economy, because they know how tenuous it is. We we have no choice but to invest some money to create jobs.

I will be happy to argue that the Main Street stimulus was insufficient, and by any measure not even close to "massive'.

Starting in the previous administration, and largely driven by people both in our government and outside, we have now set aside about $14 trillion (that's with a T) to make sure credit continued to flow, and for that we get a Wall Street who is still paying billions (that's with a B) in bonuses and credit that is no where near as available as it should be.

Separately from that, we INVESTED about $700 billion (that's with a B) in Obama's American Reinvestment Act, as a conservative measure, which was clearly sufficient to stop the hemorrhage of the 8 million jobs from our our economy when it finally started to take hold. But it has run it's course and was not sufficient to grow the economy. But no one knew how bad it was - and although there were a few arguing that it should have been bigger at the time, there was a whole lot of noise by others. So we are where we are, time to invest.

Sure the funds have to be targeted, and they need to go to infrastructure, there should be something to prevent them from simply winding up in China, and we have to address manufacturing - perhaps some programs to rival the Chinese investment in transportation and alternative energy that is going to really bite us hard in about 10 years. We need to reign in health care costs. And when we are back to full employment, we stop. The revenue coming back in will reduce the deficit.

An economist I heard said if you threw 5 buckets of water on a house fire and it continued to burn you wouldn't just conclude that water doesn't work and watch the house burn down (like we are doing right now). You put water on the house till the fire is out. Then stop. Will the house have some damage? Sure. But you will still have a house to work with. The alternative is that the city burns to the ground - an appropriate metaphor.

2 - The people that, for the most part, really screwed this up were voted out in the last election, escaped for those on Wall Street. Some of their little friends are still in government, and where they are in collusion with Wall Street need to be fired or shut down.

But the people that are in the majority now are the ones that stopped the job loss that we were handed, and I don't hear anyone else coming up with a plan that is anything but cruel and\or a complete waste of time, with the added bonus that the obstructionism and spineless whining I hear is most likely to drive this economy into complete ruin.

We can't afford not to invest more.

I disagree with a lot they have done in this adminstration, and I am not sure we are going to see this, but it is what needs to happen. If it doesn't, we are very likely to see unemployment at this same level or worse in 2012. And if we get a new administration based on the ideas being voiced by the current opposition, there will likely be more pain than the country can bear.

No one has EVER been rewarded for cutting the deficit. Bluedogs beware. (Paul Krugman, paraphrased)

thanks ;)

[OllieLotte]

8. Sorry, didn't mean to be a hit and run driver.

I don't buy into the idea of government spending bailing us out. The money never flows where it needs to. It goes to the senators interests that have been in office the longest and to ones that have the most lobbyists calling on them. I spend my money more wisely than they do and if we are going to run a trillion dollar deficit then how about letting me keep a few thousand more a year instead of them taking it way and spending it on a hookah studies in Syria? I'll put it to good use...trust me.

I work for a couple of rich guys. They are very smart and work hard. They have earned everything that they have and I consider myself lucky that they have provided me with a nice place to work. If we want to create more jobs in this country, giving them incentive and taking away obstacles to guys like them them is the way to do it. Throwing money at Washington hasn't and won't work. My 2 cents.

[jtuck004]

9. Hookah studies in Syria...hehe

You could be right about where the money goes, but I think people's minds are more concentrated these days, and we know
that training, infrastructure, technologies for the 21st century - all are areas of necessary investment. This Intertube thingy we are conversing on was a direct result of government investment in ARPA and university programs, and it has given us not only a pretty sustained level of income and production with a couple of bubbles and busts, huge improvements in communications and democracy, and allows a lot of business to make profits they could never make without it. So government investment does not always go to useless things...

As far as incentives and trusting the wealthy to do the right thing - if that was true the tax cuts and easy money of the Bush era should have led us to prosperity. Instead lots of wealth and millions of jobs moved to other countries, hurting us badly. The easy money was invested in much more housing than we needed, along with huge investment funds leveraged to heights that would have been unattainable without the complicity of government officials (i.e. active lobbying to remove regulations because, of course, we can "trust" all these good people to do what is best for us - for example, Goldman Sachs and BP).

Take a look at this post link here.... It would be incredibly selfish and naive for anyone to think that their own effort is all that is responsible for the advantages they have reaped from the work of everyone else, and I don't think your post meant to imply that. I don't deny that they are smart, and nice, and have provided you a position you like. But they didn't do it alone, and you should be thankful for many others who made that possible (and I am sure you are).

So what is a fair amout for them to return for the privelege of using their smarts to gain as much as they can from the system? I don't think 35 to 40% is too much, especially if people have been able to gain much more than others. It is a fact that when taxes were relatively higher on the wealthy than they are now most people had a higher standard of living than now, there was less poverty, a far higher number of children didn't have to depend on school lunches just to get a meal every day. When those taxes were cut deficits, income inequalities, and poverty all increased.

So I am in favor of higher taxes on the wealthy and a large stimulus program along the lines of about $1.3 trillion. (We set aside $14 trillion to help Wall Street maintain billions of dollars in bonuses, (smart people who work hard), so I don't think 1.3 is too much to spend on Main Street.

[OllieLotte]

10. Training sounds great on paper,

but if there aren’t jobs then it won’t do anyone any good, with the exception of schools and teachers. We need real jobs and throwing tons of money at the government expecting them to spend it wisely, isn’t going to work.

Your comments about my employers make it sound as though they owe their success to all of the “help” that they have received and that they should pay more taxes since they have been successful. They have provided 35 good paying jobs, with benefits to 35 families. I consider that a HUGE contribution to society and they pay a lot of taxes which provide for the welfare of others. If they drive nice cars (they do) and have great vacation homes (they do) it doesn’t bother me in the least. Do I wish I had I that stuff? Hell yes! Honestly, I don’t see where they should be obligated to provide more than they have already. We should reward smart industrious people. So why would we give hundreds of billions of dollars to banks that made bad decisions. Why would we bailout GM and reward them for being stupid? Let’s give the money to the smart people and let them see what they can do with it instead of giving it to bankers that made bad decisions and companies like GM that can’t provide a car that someone wants ($41,000 for a Chevy Volt - wait the taxpayer will kick in about $7K - so it's less)

This discussion is about jobs. If you provide incentives to guys like my employers to expand their business and take away barriers to do it, they will. If you erect barriers and take away their incentive, they won’t.

My company provides factory automation and we are very good at it. That means that the companies that we help are all in the US, that we assist them in improving quality, reducing waste, cutting energy consumption and getting rid of machine downtime, all of which allow these companies to make money, pay taxes and stay in the US employing my neighbors.

So here is the bottom line, who do you think knows best where to spend that stimulus money? My vote is for the guys that sign my check twice a month.

Cheers.

[jtuck004]

11. Incentives to your employers won't do it. Demand

for their products does it, whether we incentivize them or not. And if they choose not to create the jobs, their competitors
will.

Given sufficent demand.

And it's great to know your price.

[OllieLotte]

12. I just never thought green was a very flattering color on me. n/t

[Murray_R]

13. the concept of money can be counterfieted, it can't be faked...

"ALL consistently frame their arguments that we cannot do a stimulus or jobs package because we have to borrow. Yet, clearly, with a sovereign currency, we don't."

Zimbabwe has a 'sovereign currency'.

Why hasn't Mugabe's printing presses solved their woes?

[jtuck004]

14. Pretty funny. He writes an article that addresses your point, then you write your point.

One would almost think you hadn't read the article.

[Murray_R]

15. Yes, I read the article

and he doesn't address the point.

Why hasn't Mugabe's printing presses solved their woes?

He claims, "As budget deficits rise, this increases income (government spending exceeds tax revenue, thus adds net income to the nongovernment sector) and wealth (nongovernment savings accumulated in the form of government debt) of the nongovernment sector. Eventually, this causes private spending and production to grow."

'Eventually'? Why didn't that happen in Zimbabwe, or Weimar? Why did instead and exchange and production start dropping? He doesn't account for the fact that the economy, particularly its growth, isn't a function simple of spending and consumption, but profit and investment. If there are no profits, there can be no investment, there can be no expansion, there can be no improvement of living standards. When governments manipulate the currency the inflation distorts market prices, misleads consumers, investors and entrepreneurs of underlying supply and demand, and thereby disrupts the smooth functioning of the economy. We end up, for example, building millions more houses than we need, and then suffer the wrenching re-adjustment toward the underlying fundamentals of supply and demand. More injections of cash will benefit the first to recieve it, but as it spreads in the economy prices adjust, and those who save and make the least are left worse off than before because their purchasing power has been diminished.

His example of it 'working' is when the government severely rationed goods, set wage and price controls, and completely curtailed vast amounts of the consumer economy, as well as pressing over 14 million people into the non-wealth building activity of slaughtering other people and gutting their cities. And yet even that example only 'works' because the scale of deficits quickly wound down, and the economy was freed from the rationing and price controls.

That situation isn't analogous to where we stand now, and the future we have staring us in the face with massive entitlement programs with structural deficits stretching for decades that are already here. People born after the early 70's won't even get a dollar returned for each dollar they pay into social security just based on life spans and the tax/benefit rates. Never mind what has happened to the value of that dollar since the unleashing of the printing presses in 1971.

Trying to compare today's economy, where our consumer goods are made all over the world, to the midst of WW2 when consumer goods were essentially banned and world trade was in turmoil, is a joke.

Yes, we won't be insolvent, but we will be completely impoverished if we follow the inflationists agenda. This crap has been tried over and over again through the centuries, the results aren't a mystery.