FacebookTwitterRedditEmail

In Praise of Deficits

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

 

More articles by:

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

bernie-the-sandernistas-cover-344x550
July 23, 2019
Patrick Cockburn
Why Boris Johnson is Even More Dangerous Than Trump
Christopher Ketcham
The American West as Judeo-Christian Artifact
Jack Heyman
Whitewashing American History: the WPA Mural Controversy in San Francisco
David Mattson
Through the Climate Looking Glass into Grizzly Wonderland
David Macaray
Paul Krassner and Me
Thomas Knapp
Peckerwood Populism is About Political Strategy, Not Personal Belief
John Kendall Hawkins
Assange and His Wiki Wicked leaks
Howard Lisnoff
What Has Happened to the U.S. Since the Kids Left Woodstock?
Victor Grossman
“How Could They?” Why Some Americans Were Drawn to the Communist Party in the 1940s
Gary Leupp
Minnesota, White People, Lutherans and Ilhan Omar
Binoy Kampmark
Lunar Narratives: Landing on the Moon, Politics and the Cold War
Richard Ward
Free La Donalda!
July 22, 2019
Michael Hudson
U.S. Economic Warfare and Likely Foreign Defenses
Evaggelos Vallianatos
If Japan Continues Slaughtering Whales, Boycott the 2020 Tokyo Olympics
Mike Garrity
Emergency Alert For the Wild Rockies
Dean Baker
The U.S.-China Trade War: Will Workers Lose?
Jonah Raskin
Paul Krassner, 1932-2019: American Satirist 
David Swanson
U.S. Troops Back in Saudi Arabia: What Could Go Wrong?
Robert Fisk
American Visitors to the Gestapo Museum Draw Their Own Conclusions
John Feffer
Trump’s Send-Them-Back Doctrine
Kenn Orphan – Phil Rockstroh
Landscape of Anguish and Palliatives: Predation, Addiction and LOL Emoticons in the Age of Late Stage Capitalism
Karl Grossman
A Farmworkers Bill of Rights
Gary Leupp
Omar and Trump
Robert Koehler
Fighting Climate Change Means Ending War
Susie Day
Mexicans Invade US, Trump Forced to Go Without Toothbrush
Elliot Sperber
Hey Diddle Diddle, Like Nero We Fiddle
Weekend Edition
July 19, 2019
Friday - Sunday
Rob Urie
The Blob Fought the Squad, and the Squad Won
Miguel A. Cruz-Díaz
It Was Never Just About the Chat: Ruminations on a Puerto Rican Revolution.
Anthony DiMaggio
System Capture 2020: The Role of the Upper-Class in Shaping Democratic Primary Politics
Andrew Levine
South Carolina Speaks for Whom?
Jeffrey St. Clair
Roaming Charges: Big Man, Pig Man
Bruce E. Levine
The Groundbreaking Public Health Study That Should Change U.S. Society—But Won’t
Evaggelos Vallianatos
How the Trump Administration is Eviscerating the Federal Government
Pete Dolack
All Seemed Possible When the Sandinistas Took Power 40 years Ago
Ramzy Baroud
Who Killed Oscar and Valeria: The Inconvenient History of the Refugee Crisis
Ron Jacobs
Dancing with Dr. Benway
Joseph Natoli
Gaming the Climate
Marshall Auerback
The Numbers are In, and Trump’s Tax Cuts are a Bust
Louisa Willcox
Wild Thoughts About the Wild Gallatin
Kenn Orphan
Stranger Things, Stranger Times
Mike Garrity
Environmentalists and Wilderness are Not the Timber Industry’s Big Problem
Helen Yaffe
Cuban Workers Celebrate Salary Rise From New Economic Measures
Brian Cloughley
What You Don’t Want to be in Trump’s America
David Underhill
The Inequality of Equal Pay
David Macaray
Adventures in Script-Writing
FacebookTwitterRedditEmail