Budget buzz

Reader rjs has a link filled write up on the budget proposals coming out last week with a note on the economic thoughts on the matter:

There was quite a bit of unwarranted buzz around the blogosphere about a number of budget plans that were introduced early this week, all of which were likely an outgrowth of the requirements imposed on both houses of Congress by the debt-ceiling postponement, that budget resolutions be passed by mid April or the member’s pay would be suspended; two primary proposals were put on the table by Patty Murray, chair of the Senate Budget Committee, for the Democrats, and by Paul Ryan, republican chair of the similar committee in the House, as the template for the Republican plan; there was also a budget proposal by the progressive caucus entitled The Back to Work Budget (pdf)…

but having this plan, which suggests that we should balance the federal budget, around all week did bring to the fore what seems to be a widespread misunderstanding about our fiscal situation
as long as the US continues to run trade deficits, it is impossible for the federal government to balance its budget while the private sector is deleveraging…every dollar of private sector surplus is always offset by a government sector deficit, and vice versa; its an accounting identity…therefore reducing government deficits will of necessity reduce private sector surpluses accordingly…

This can best be seen on the adjacent chart from Goldman’s chief economist Jan Hatzius…what you see here is that the financial balance of three sectors (private, government, and foreign) always and must net out to zero; because one sector’s income is always another sector’s spending…thus the only time the Federal budget can come close to balance is when the private sector is going into debt in a substantial way, such as we saw during the boom years early last decade…most other times, government borrowing, issuing notes bills and bonds, is just the Treasury’s equivalent of monetary expansion, creating the money needed for the economy to grow…and any attempt to reduce government deficits risks inducing a worse recession…

(Dan here…lightly edited for readability)

Tags: Comments (7) | |