FacebookTwitterGoogle+RedditEmail

In Praise of Deficits

by MARSHALL AUERBACK

From the Guardian:

‘[Senator Jeff] Sessions appeared to dash hopes of an easy nomination process. “Jack Lew must never be secretary of treasury,” he said. Sessions said comments made by Lew two years ago, when he claimed that Obama’s budget plans would steer the US to a position where “we’re not adding to the debt anymore”, were “outrageous and false”.

The president claimed Lew was well qualified for the job of balancing the budget. “Under President Clinton, he presided over three budget surpluses in a row.” In word aimed at Republicans in Congress, he added: “So for all the talk out there about deficit reduction, making sure our books are balanced, this is the guy who did it. Three times.”‘

Well, if Senator Sessions were to adopt President Obama’s arguments AGAINST the nomination, we’d probably support his objections. As usual, our hopelessly out of paradigm deficit-hating President gets it wrong again in regard to fiscal policy. The roots of our current economic malaise started during the Clinton years when the federal government was running the biggest budget surpluses the government has ever run. Everyone thought this was great because it meant that the government’s outstanding debt was being reduced. Clinton even went on TV and predicted that the budget surpluses would last for at least 15 years and that every dollar of government debt would be retired.

Everyone celebrated this accomplishment, and claimed the budget surplus was great for the economy.

In fact, what was actually happening was that the budget surplus meant by identity that the private sector was running a deficit. Households and firms were going ever farther into debt, and they were losing their net wealth of government bonds. This eventually caused a recession because the private sector became too indebted and thus had to cut back spending.

In fact, the economy went into recession within half a year, although the recession was short-lived due to rise of budget deficits under Bush (which began to put a floor on aggregate demand) along with the increasing resort to toxic debt instruments to help fund a housing bubble – yet more PRIVATE debt, rather than public debt – which created the seeds for the Great Recession of 2008.

Of course we still have large budget deficits. No one talks any more about achieving budget surpluses this decade; almost everyone agrees that we will not see budget surpluses again in our lifetimes—if ever. And these deficits are consistently decried by everybody, including the President (as his misguided praise of Treasury Secretary nominee Jacob Lew illustrates), despite the fact that they ensured that the Great Depression did not morph into Great Depression 2.0. What happened in the United States was that we had a very flexible and effective system of public transfer payments which rose rapidly in the crisis. Unemployment insurance, early retirement under social security, disability, lower tax collections, and then on top of that, the expansion package, the stimulus package, the Keynesian policy that came into effect very quickly. And these things broke the fall in incomes and preserved living standards to a very substantial degree.

The question is whether the US government can run deficits forever. The answer is emphatically “yes”, although this is very separate from the question of whether it should do so. But one thing that the President (and the deficit-phobic Congress) should bear in mind is this: If you look back to 1776, the federal budget has run a continuous deficit except for 7 short periods. The first 6 of those were followed by depressions—the last time was in 1929 which was followed by the Great Depression. The one exception was the Clinton budget surplus, which was followed (so far) only by a recession.

Why is that? By identity, budget surpluses suck income and wealth out of the private sector. This causes private spending to fall, leading to downsizing and unemployment. The only way around that is to run a trade or current account surplus.

The problem is that it is hard to see how the US can do that—in fact, our current account deficit is now around 4% of GDP. All things equal, that means our budget deficit has to be even larger to allow our private sector to save.

Again, to reiterate: government deficits are NOT always good, or that the bigger the deficit, the better. The point I am making is that we have to recognize the macro relations among the sectors. If we say that a government deficit is burdening our future children with debt, we are ignoring the fact that this is offset by their saving and accumulation of financial wealth in the form of government debt. It is hard to see why households would be better off if they did not have that wealth.

If we say that the government can run budget surpluses for 15 years, what we are ignoring is that this means the private sector will have to run deficits for 15 years—going into debt that totals trillions of dollars in order to allow the government to retire its debt. Again it is hard to see why households would be better off if they owed more debt, just so that the government would owe them less.

That’s the kind of thing that our presumptive new Treasury Secretary should be saying at his impending confirmation hearings. Given his record, and the President’s misguided praise in favour of Clinton’s budget surpluses, fat chance of that occurring.

MARSHALL AUERBACK is a market analyst and commentator. He is a brainstruster for the Franklin and Eleanor Roosevelt Intitute. He can be reached at MAuer1959@aol.com

 

Marshall Auerback is a market analyst and a research associate at the Levy Institute for Economics at Bard College (www.levy.org).  His Twitter hashtag is @Mauerback

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
January 20, 2017
Friday - Sunday
Paul Street
Divide and Rule: Class, Hate, and the 2016 Election
Andrew Levine
When Was America Great?
Jeffrey St. Clair
Roaming Charges: This Ain’t a Dream No More, It’s the Real Thing
Yoav Litvin
Making Israel Greater Again: Justice for Palestinians in the Age of Trump
Linda Pentz Gunter
Nuclear Fiddling While the Planet Burns
Ruth Fowler
Standing With Standing Rock: Of Pipelines and Protests
David Green
Why Trump Won: the 50 Percenters Have Spoken
Dave Lindorff
Imagining a Sanders Presidency Beginning on Jan. 20
Pete Dolack
Eight People Own as Much as Half the World
Roger Harris
Too Many People in the World: Names Named
Steve Horn
Under Tillerson, Exxon Maintained Ties with Saudi Arabia, Despite Dismal Human Rights Record
John Berger
The Nature of Mass Demonstrations
Stephen Zielinski
It’s the End of the World as We Know It
David Swanson
Six Things We Should Do Better As Everything Gets Worse
Alci Rengifo
Trump Rex: Ancient Rome’s Shadow Over the Oval Office
Brian Cloughley
What Money Can Buy: the Quiet British-Israeli Scandal
Mel Gurtov
Donald Trump’s Lies And Team Trump’s Headaches
Kent Paterson
Mexico’s Great Winter of Discontent
Norman Solomon
Trump, the Democrats and the Logan Act
David Macaray
Attention, Feminists
Yves Engler
Demanding More From Our Media
James A Haught
Religious Madness in Ulster
Dean Baker
The Economics of the Affordable Care Act
Patrick Bond
Tripping Up Trumpism Through Global Boycott Divestment Sanctions
Robert Fisk
How a Trump Presidency Could Have Been Avoided
Robert Fantina
Trump: What Changes and What Remains the Same
David Rosen
Globalization vs. Empire: Can Trump Contain the Growing Split?
Elliot Sperber
Dystopia
Dan Bacher
New CA Carbon Trading Legislation Answers Big Oil’s Call to Continue Business As Usual
Wayne Clark
A Reset Button for Political America
Chris Welzenbach
“The Death Ship:” An Allegory for Today’s World
Uri Avnery
Being There
Peter Lee
The Deep State and the Sex Tape: Martin Luther King, J. Edgar Hoover, and Thurgood Marshall
Patrick Hiller
Guns Against Grizzlies at Schools or Peace Education as Resistance?
Randy Shields
The Devil’s Real Estate Dictionary
Ron Jacobs
Singing the Body Electric Across Time
Ann Garrison
Fifty-five Years After Lumumba’s Assassination, Congolese See No Relief
Christopher Brauchli
Swing Low Alabama
Dr. Juan Gómez-Quiñones
La Realidad: the Realities of Anti-Mexicanism
Jon Hochschartner
The Five Least Animal-Friendly Senate Democrats
Pauline Murphy
Fighting Fascism: the Irish at the Battle of Cordoba
Susan Block
#GoBonobos in 2017: Happy Year of the Cock!
Louis Proyect
Is Our Future That of “Sense8” or “Mr. Robot”?
Charles R. Larson
Review: Robert Coover’s “Huck out West”
David Yearsley
Manchester-by-the-Sea and the Present Catastrophe
FacebookTwitterGoogle+RedditEmail