Final destination “rising public deficits” with a stopover in “falling public deficits”
Brad DeLong and Mark Thoma posit that a falling US public deficit is bad news – they are right!
Deficit hysteria is now mainstream thinking, while the more appropriate hysteria should be “jobs hysteria”. How in the world is nominal income growth expected to finance a drop in consumer debt leverage if the government supports a smaller deficit? TARP costs less and tax receipt growth is beating expectations. But that’s all it is, beating expectations.
This only proves the endogeneity of the deficit: the sole reason that the private sector is producing stronger-than-expected growth in tax receipts is BECAUSE the government ran large deficits.
Put it this way: as long as the US is running current account deficits, then a shrinking government deficit will, by definition, squeeze liquidity from the private sector. During a “balance sheet recession”, the government should be growing its balance sheet not shrinking it.
An excerpt from the Japan’s Quarterly Economic Outlook (Summary*) (Summer 1997):
“Thus, recovery in personal consumption is expected to continue after the reaction to the rise in demand ahead of the consumption tax hike subsides in the near future. However, the pace of recovery is likely to be moderate considering the increases in the tax burden, such as the rise in the consumption tax.”
RW: Boy were they wrong – moderate?
GDP fell 2.0% in 1998 (from +1.6% growth in 1997) and consumption growth turned negative over the year, -1.1% (from +0.8% in 1997). Please see slide 9 from one of Richard Koo’s presentation in 2008; he highlights the policy-mistake-induced “unnecessary government deficits”. The point is: the government deficit is not some exogenous “thing” that the government controls; it’s very much endogenous and a function of private demand.
We’re on this road now: squeezing liquidity out of the private sector; supporting minimal wage growth; and imminent deleveraging is on the horizon(more likely the default route). And Congress is happy that they are squeezing private sector liquidity? I guess so, as reported by the Wall Street Journal yesterday:
“Like a number of Democrats, Mr. Blumenauer said he’s “intrigued” with the consumption-tax idea. Tax experts say consumption taxes are regressive, because lower-income people tend to spend more of their income. But a consumption tax could be designed with offsetting breaks for lower-income Americans, to shield them from its impacts.”
Rebecca Wilder
Some people think it looks like this.
We have tax breaks for mortgages and also moved up the alt min tax. Consumption taxes next with a tax break for lower incomes? Mandatory health insurance with a tax break for lower incomes? Maybe carbon taxes or whatever with a tax break for lower incomes? How many buckets will we have for the cow? Almost forgot “stim plans” that bail out state and local governments.
When are we ever going to figure out how much tax people should pay? A progressive income tax rate was fundamentally a workable idea, but if we are going to send both high income and low income people to CPAs, what’s the point. Lets not have taxes. Our collective liquidity would get better.
It’s just that banks have most of it and are marking their capital to make believe, and are back to paying themselves huge bonuses putting the liquidity in their pockets.
We have some serious fairness issues with this economy, even if employment was getting better.
So now some economists are worried that we get a double dip, probably because we didn’t do enough stim spending (just guessing, been down this road before), meaning that we didn’t create sustainable private sector jobs? But some paid taxes, and corporate profitability/taxes improved (layoffs) which improved the revenues. And economists are worried????
I think the uneducated public is worried about the deficit because they don’t think the government or economists really have a clue about what to do about unemployment.
This cartoon was what I was referring to.
Ok, I give up trying to post the graphic. Here’s the link. Funny enough for the extra mouseclick.
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/paulson/CartoonUSTreasuries.jpg
Our ace in the hole is the upcoming sunset of the big Bush social experiment in tax cuts for the rich. We sure don’t seem to have gotten our two trillion dollars worth, but that’s what happens with radical social experiments. I don’t think it would hurt to balance the budget, but we have to do it in a way that puts money into motion. Rich people just don’t spend very much when compared to poorer people, so we need to take back some of the big tax cuts that have been stifling our economic growth since the 80s and give them to people who will spend every nickel they can get and then some. Hey, it worked in the 30s and 40s.
Don’t worry folks
they can always get the money out of Social Security. Bernanke said so. Old people don’t need to retire. They can just get a job in the booming economy that results from cutting taxes.
Rebecca,
You may want to substitute this link for the WSJ article (no subscription required to my knowledge; it’s the Google search link):
http://online.wsj.com/article/SB10001424052702304703104575174263375942030.html?mod=rss_Today's_Most_Popular
I believe that you could have written a better piece. You have an excellent grasp of unfolding events and potential outcomes than is indicated in your commentary. This is your professional strength in my opinion and it should serve you well over the spam of your career. You have the rare capability to assemble the whole picture quickly.
I would like to say that I agree with you regarding your commentary. In truth, I have many problems with your main post, starting with DeLong’s assessment, Thoma’s overview including his update, and your take on the situation. First and foremost, I recommend a careful read of the Treasury monthly financial statement.
In summary, DeLong’s take is simply wrong in my judgement. Thoma failed to go into enough detail to explain where the Federal revenue growth was coming from and why that is not necessarily great earthshaking news (it isn’t). Good news, yes, but a bit misleading if attempting to explain to the public what actually occurred. And your cheerleading of their efforts is misplaced in my opinion. Blog politics and multi linking to one another aside, their pieces weren’t very good.
DeLong, Thoma, and you appear to not be interested in making the valid distinctions between three principal considerations: (1) a declining fiscal year deficit is very good news for a number of reasons; (2) a declining fiscal year deficit might serve as an excellent reason for providing another round of stimulus spending, though there is no guarantee that Congress would support the action; and (3) the “deficit hysteria” (your term and that of others) is not so much focused on FY 2011 or FY 2012, but future fiscal years such as FY 2015, the year that the President is directing the deficit commission to target for a balanced Federal budget. Moreover, there should be little expectation that employment will ramp up sufficiently to recover the recession losses perhaps no earlier that FY 2015, regardless of throwing more government stimulus at the economy unless, of course, the effort was not targeted solely for increasing employment on a sustainable basis (my opinion); there are other valid reasons for attempting to secure a third stimulas package above and beyond the Bush II stimulus and Obama stimulus.
A focus on long term deficit and national debt problems is valid. Discussions occurring in various quarters today may eventually lead to meaningful action by FY 2013-2015, with my expectation being that FY 2015 is more realistic considering what will be involved in addressing the complexity of Federal revenue inflows and outlays. Now, my timeline may be junk or quickly ruled invalid by further discussion and initiatives by Pelosi, Volcker (aka Obama Administration), and other trial run spokesmen intent on advancing the implementation of a VAT or national sales tax (and they are different). The bottom line: Long term deficit and national debt analyses may be absolutely necessary in order to prevent market resistance of sales of marketable U.S. Federal securities as the national debt increases, driven by large deficits and interest payment obligations further emflamed by growing yield requirements. The problem may grow out of control as global confidence collapses.
As an aside, I recommend a read of Jim Grant’s United States of America Bonds […]
WSJ: “But a consumption tax could be designed with offsetting breaks for lower-income Americans, to shield them from its impacts.”
Yes, it could. But this is America, folks. We do not readily give breaks to lower income people. If such a tax were enacted, along with offsetting transfers, the link between the two would soon be forgotten, and the transfers would become politically opposed as undeserved.
MG,
George Miller (CA) is the exception: he is pushing a large jobs bill in the House (http://thomas.loc.gov/home/gpoxmlc111/h4812_ih.xml). This is good, but unlikely to go anywhere due to the crazy hysteria!
“(3) the “deficit hysteria” (your term and that of others) is not so much focused on FY 2011 or FY 2012, but future fiscal years such as FY 2015, the year that the President is directing the deficit commission to target for a balanced Federal budget”
The problem, and hence the commentary, is how do we get to 2015? Balancing the budget by then is a pipedream – Macroadvisers has a -5.6% (of GDP) in 2015 (no link, sorry). Actually, yes, I do feel that it is premature (not to mention irrelevant) for Congress to be expending resources to assess the “best” tax at this point in the game. The economy is just barely moving (housing starts, permits, consumer confidence, autos – those variables that usually provide the impetus for expansion – are all moving laterally).
As you say, inflation pressures that could result from deficit spending is a letigimate worry when the economy is growing near capacity. But we are in a land far, far away, and the labor market need further mending through fiscal initiatives. And unfortunately, when the Obama team is “optimistic on deficit” and not re-allocating the resources, the chances of fiscal impetus and fiscal cuts just rose.
“ (2) a declining fiscal year deficit might serve as an excellent reason for providing another round of stimulus spending, though there is no guarantee that Congress would support the action;”
Yes, of course. But Congress is now sitting on their hands, biding time, until the “private-sector recovery” gets going. Well, if Richard Koo is right, then that’s not going to happen – think about what’s going on in your state right now. In Massachusetts, they raised property taxes, excise taxes, fees, etc. The drag coming from the state and local governments is off-setting anything coming out of Washington. They should be doing much, much more. But instead they are talking about VAT taxes (in 3-5 years, of course, but that would be an appropriate mean time frame between Japan’s mistakes and the US in the 1930’s mistakes).
“(1) a declining fiscal year deficit is very good news for a number of reasons;”
This I completely disagree with, unless the private sector saving was equal to desired saving. It’s not. As long as the private sector is deleveraging and Asia runs surpluses against the US, then my gosh, deficits must be big. If they aren’t, then you get the “unnecessary deficits” down the road that come along with weak economic performance.
Rebecca
MG,
The link above isn’t valid (I just copied the link after performing a search): Here’s an alternate link: http://edlabor.house.gov/newsroom/2010/03/congress-and-mayors-announce-n.shtml
Or you can search for the bill, H.R. 4812, on THOMAS, http://thomas.loc.gov/.
Rebecca Wilder
Gotta say, this “is the smaller deficit good news?” approach is badly misguided. It seems to have started with DeLong. When it comes to sound-bite assessments, DeLong is not somebody you want to follow without giving it a good bit of thought. He is a very good economist and a good thinker all around, but when it comes to crafting one-liners, the man is often a disaster.
Fiscal balance as a product of policy and economic activity after the fact needs to be treated differently than fiscal balance as a policy goal before the fact. What we have here, mostly, is a smaller than expected deficit, the result of policy that worked (TARP and GSE bail-out payments far smaller than a year ago) and economic activity (a pick-up in revenue) that is probably also the result of policy. As a symptom, a smaller deficit is good, suggesting that policy efforts are paying off and that economic activity is recovering to the point that revenue is recovering.
What DeLong and Thoma and Rebecca seem to mean when they claim it is bad is that we should have a goal of a wider deficit. Fine, but there must be a better way to say it than simply to declare that a an symptom of improvement is bad news. There is lots to discuss when it comes to fiscal policy, and Rebecca does a reasonable job of it, but wrapping that discussion in a dumbed-down “good vs bad” dichotomy is a bad way to start.
A smaller deficit is good news as a symptom. It would be (and apparently is) bad as a policy goal for now. The effort to focus on one of these and deny the other looks like a ham-handed effort at spin. Let’s just get back to substance and stop trying to slap a reporter-ready sticker on the analysis.
Here’s a chart of household debt. Economists love to avoid talking about this fact while busily chatting about fiscal and monetary measures to stimulate the economy and employment “until the private sector economy recovers”.
Now anyone can see from this chart why there is a problem, and that it may take many years to correct. The thing that bothers me is we use the peak GDP and employment we got in the biggest boom of all time, and say the problem is we are below those numbers.
Then we say we have a “liquidity trap”, government “must” supply the missing aggregate demand, and the independant variable is the CA deficit, and dependant variable is government spending to prevent disaster in our GDP number?
Who’s trying to rob whom?
BTW, MG and I must read the same blogs. I saw Grant’s credit analysis of the USG, and it was quite shocking to see we do accounting similar to a banana republic.
Also, just so I don’t get lumped in with “crazy right-wingnuts hanging out at Tea Parties with a semi-automatic shot gun wearing Sarah Palin tee-shirts”, I’ll agree that governement does provide many necessary services and better than private industry.There are the well know cases, and it may even be neccesary for government to expand into more areas not served well by the private sector. I don’t think I’m getting my wish here however because we missed our opportunity in banking (kept too many private banks, and advanced the error of the GSE concept), and health insurance (single payor is better), and will go with Cap and Trade as the solution to climate change/energy infrastructure rather than having government figuring out key pieces of energy infrastructure, legal support, and loan guarantees that only government can do.
So we get no investment return on government spending.
http://www.calculatedriskblog.com/2010/04/household-debt-as-percent-of-gdp.html
“A smaller deficit is good news as a symptom”
This is a very important point, maybe THE most important point to be made in this entire discussion.
Deficits are a result of something and not the cause of anything. Deficits are a measurement and thus only reflect the relationship between other economic metrics. Focusing on deficits is like focusing on the color change in your ceilings when water is collecting in your attic.
Thank you for making this point kharris. It cannot be made too loudly
Cedric,
This is part of the problem. The balancing act that is being played right now between private and public sector saving requires big public deficit spending. But as your cartoon so clearly illustrates, the need for stimulus and deficit spending has neither been understood by the public nor has the spending itself in some cases been advantageous to the real economy (Citi, for example).
Rebecca
kharris,
Actually, what I was referring to as “bad” is the optimism for the lower than expected budget deficit. What people (except those from whom I learn like Marshall Auerback, Randy Wray, Bill Mitchell, and Warren Mosler) fail to understand is that this is not even a “symptom” – I would choose to avoid the term symptom because that implies some sort of disease associated with the spending – it just is; it’s a mathematical equation, the private public saving model is completely endogenous.
Given that firms are sitting on excess cash, refinancing, and not hiring, a BIG jobs bill is in order. So yes, I see it as “bad news” that the Obama administration is even optimistic about the lower-than-expected budget. Littered in the original Post article are words like favorable, optimistic, peak [deficit], etc. That sets the tone for minimal support for further stimulus measures (a.k.a., the success of a big jobs bill like Miller’s being passed).
Rebecca
kharris: “A smaller deficit is good news as a symptom. It would be (and apparently is) bad as a policy goal for now.”
If it is a bad policy goal, then, as a symptom, doesn’t it indicate the inadequacy of current spending?
Speaking in general, it cannot be interpreted aside from other indicators. When the economy is booming, a low deficit is better news than a high deficit, but when the economy is in recession or limping along, a low deficit is worse news than a high deficit. No?
I’m afraid you have given me credit for making a point I did not make, and which I reject, as well as making the point that I did make. Deficits are a result as well as a cause. I would never agree that deficits “are not the cause of anything”. It should have been clear from my first comment, that I accept the value of fiscal stimulus during periods of below-trend economic performance. The US is still massively below trend, and fiscal stimulus is needed, to “cause” growth.
My point was and is that when fiscal expansion works works, we ought to be willing to say that it has, and not insist that a resulting smaller deficit is “a bad thing”, thereby screwing up the chance to have a reasonable discussion.
I agree it is possible, if the analogy is not made clear, to take public spending as the disease. The disease of the “sypmptom” analogy is poor economic performance. The medicine in counter-cyclical policy efforts, and the symptom in this case is the divergence of fiscal outcomes from estimates.
You will recall that what I urged you to do was give up the “good news/bad news” dichotomy that DeLong initiated. The WP article did not actually do much of the good/bad news thing from anything but a political view, and did so stupidly. It may have inspired the whole round of “good/bad news” blog posts, but they seem mostly to have to do with the real world, rather than the WP’s made up political model in which nothing that happens can be good for Democrats at the midterm.
Anyway, I urged you to abandon the “good/bad news” dichotomy because it is so prone to mislead readers. You have had to come back around and explain the dickens out of your original post – evidence that the “good/bad news” wrapper didn’t help foster understanding of the substance of whaty you wrote. So, again, putting a reporter-ready wrapper on this sort of thing is probably a bad idea, especially if one doesn’t have a gift for it. DeLong does not. This is, I believe, his wrapper, so I won’t assess whether you have a gift for clever wrappers that get reporters to write the substance correctly. In following DeLong, though, you give evidence that you don’t have much of a gift in that way, so I recommend caution in trying to be glib enough for prime time.
The deficit is not low. It is merely lower than was projected. Lower than was projected means either than spending was less or tax revenue more than expected. If those results are due to economic performance (that is only partly the case right now), then it is a symptom of better than expected economic performance.
I’m eager to say “don’t make this harder than it has to be” but my initial point was that “good/bad news” is a poor wrapper for the substance of this discussion, so I guess I won’t. I do think, though, that we can separate deficits as policy goals from deficits as results.
MG: “the “deficit hysteria” (your term and that of others) is not so much focused on FY 2011 or FY 2012, but future fiscal years such as FY 2015, the year that the President is directing the deficit commission to target for a balanced Federal budget.”
The deficit hysteria is focused on NOW. The best way to have low deficit/GDP ratio in 2015 is to have a robust recovery. To get there probably entails higher deficits in the near term, but those who talk about a potential deficit problem in the future don’t say that, do they? That’s because they really want to dampen current deficit spending, as well. They just do not say so, but instead engage in fear mongering.
Cedric Regula: “Here’s a chart of household debt.”
I had a little trouble finding the chart. The link is at the end of your note.
CR: “Now anyone can see from this chart why there is a problem, and that it may take many years to correct.”
I confess that I cannot see those things. The chart shows a long term upward trend in mortgage debt. What does that mean? I don’t know. Rising house prices? That was true recently, but how long can that go on? More people owning houses? I think that is so, especially as social barriers have come down. But I don’t know. Increasing inequality? With prosperity being siphoned upwards, it is harder for middle class people to pay off their mortgages? Maybe so. Related, perhaps, is a change that I have observed. More people are borrowing against their homes to finance a variety of things, such as college tuition or retirement. Is that a problem?
Mortgages have always been a major factor in household debt. Why do you think that “He bought the farm,” is a euphemism for dying? Because paying off the mortgage was a lifelong task.
So to what extent this graph indicates problems, I don’t know, and if so, what the solutions are, I don’t know.
CR: “The thing that bothers me is we use the peak GDP and employment we got in the biggest boom of all time, and say the problem is we are below those numbers.”
That kind of thing bothers me, too. Like people talk about how long it took the stock market to “recover” from the 1929 crash. As though getting back to the same price level is the same thing. BTW, as for unemployment, we had lower unemployment in the 1950s, without the bubbles.
CR: “Then we say we have a “liquidity trap”, government “must” supply the missing aggregate demand, and the independant variable is the CA deficit, and dependant variable is government spending to prevent disaster in our GDP number?”
I suppose that you would like to see household debt come down. That is my inclination, as well. But where is the non-governmental sector to get the money to pay down its debt, or to save? Private banks can create money, but they only do so by creating debt, as well. So that is not the answer. The money to do that can come only from the government, via government deficits.
“Who’s trying to rob whom?”
I suppose that that is a rhetorical question. The only answer I can come up with is that we are trying to rob ourselves, which is impossible. But we can do harm to ourselves by prolonged economic stagnation and high unemployment.
What are deficits a cause of? Deficits are simply a name we put to an accounting identity that shows that at this moment there is less revenue from taxes coming in than spending going out. Thats all it is. It can be positive and our economy still be in a shambles or it can be waaaaay negative and we have low unemployment and stable prices. When our economy slows deficits automatically show up(via the automatic stabilizers in unemployment payments), those deficits do not “cause” further deterioration.
Maybe it would be more accurate to say that increased deficits can never be said to always be a cause of anything in particular. We could be running huge surpluses and stil have runaway inflation if we had a huge external supply contraction. It is erroneous to say that large deficits will lead to inflation as is commonly said. You can have huge deficits and deflation so there is no causal relation between deficits and the price levels in an economy.
It would not be accurate at all to say that “increased deficits can never be said to always be a cause of anything in particular.” Increased deficits mobilize private sector savings. In times of trend growth or better, that can happen at the cost of moving credit from the private to the public sector. In times of growth below trend, when savings tend to pile up unused, mobilizing private savings means increasing aggregate demand and production. That is not nothing. I realize lots of people like to claim that government borrowing cannot affect real outcomes, but it simply is not true. As a number of people cleverer than me have pointed out, the same logic would conclude that private borrowng cannot affect real outcomes. Anybody want to line up behind the claim that private borrowing doesn’t affect real outcomes?
If out of control spending, raising the scope of Government, and raising taxes was the answer, every President and Congress since Lincoln would have been doing just that, and we wouldn’t be in the mess we are in.
If your not gonna talk about cutting and targeting the spending better, then you can’t talk about raising taxes or the VAT.
We are in a race to the bottom, and the geniuses who have been telling us, that all the smart kids had the answer…….”it’s all Bush’s Fault…..Obama’s smartest guys in every room in history…..Republicans are Dumb Thugs….Democrats are Angles who only want to help the childern,” were wrong and completely exposed themselves as liars and idiots.
If anybody here believes that were gonna turn this around by spending more while increasing the tax burden, I got a bridge to sell you.
The entire propoganda machine on this topic is about re-distribution, if that means we are all going down with the ship, obviously the people who believe in that type of behavior don’t care.
This seems to be yet another chapter in the story of the question of a balanced budget. A long and sordid tale it is, but it is beginning to read like a fictionalized account of profligate spending in America. What’s a poor country to do? We ain’t got the cash to pay the bills. Who’s going to figure it all out and come up with a plan? Lot’s of cogitation. Fortunately no long lists of numbers to further confuse the uninitiated. Small consolation however.
How does a discussion of government spending get so prolonged without anyone mentioning that the two on going campaigns in the middle east have cost near a trillion dollars, or maybe even more. The jury is still out on the actual total cost. Maybe what this blog needs is a few historians added to the many economists (amateur and pros alike) that post here. How many previous “great” empires have been brought to their knees by military adventure?
Rebecca,
Have you cracked the cover of the ‘Monthly Treasury Statement of Receipts and Outlays of the United States Government For Fiscal Year 2010 Through March 31, 2010, and Other Periods’? http://www.fms.treas.gov/mts/mts0310.pdf
The mistakes, misrepresentations, knee jerk reactions, and poorly researched data that some have shared in discussing the Government’s current financial position are obvious once the document is studied. Treasury’s comparison to the same time period for FY 2009 is the key to evaluating where or not key improvements have occurred.
Many Federal revenues streams are now in worse shape than during the same YTD period in 2009. The same can stated for outlays with a few exceptions. This excludes a direct comparison of March 2010 to March 2009 balance sheets and line items, which may reveal a different financial trend.
No MG, what you continuously fail to understand is that “the U.S. Government’s financial balance sheet” has an overwhelming albatross on expense side of the ledger in the form of our crusades in both Iraq and Afghanistan. Dismiss for the moment any morality concerns that relate to those wars. The financial cost is, and has been for nearly a decade, draining our Treasury. There aren’t any clearly deliniated lists of costs for these adventures. Some are hidden, buried away deep in the DoD budget. Some, maybe the greatest in the long run, will accrue and grow as the people damaged by these activities arrive back home and need long term mending. With the Treasury bleeding resources that might better be allotted else where, it would be prudent to stem the greatest and most apparent out flow directly and without additional commission analysis and “expert” study.
After that there’s the question of balancing the tax sources so that those Americans that have been benefiting most from our county’s economic activity bear the greater burden of supporting the government that makes that largess possible. Both actions would be patriotic. It’s unfortunate that killing and mayhem together with personal greed seem to have trumped sane policy making.
Let’s see if I can make this a bit simpler. I’ll try a sequential process. 1) The government stops squandering resources on destructive activities in other parts of the world. 2) Those resources are then invested in a variety of useful and productive activities within the nation. 3) People are employed in the process of the more productive allocation of those resources at home. 4) Potential increased employment in productive activities leads to an increase in personal income. 5a) People with more income spend more money. 5b) People with more income pay more taxes. 5c) People with more income reduce their personal debt. 6) All three categories of 5 help to further enhance the country’s economic activities. 7) Enhanced economic activity noted in 6 brings the process back to 3 and yet more people are employed.
I know it is far too simple and can’t be used as the basis of a dissertation, but its a broad outline of a plan proven to be effective by the global historical record. Less warfare leads to more productive economic activities which leads to everyone’s eventual benefit. Note that I’ve included more than seven numbers for those who are focused on the measurement of economic activity.
The US spending to income ratio is widening for the first time since 4 decades:
http://www.bond-bubble.com/index.php/us-publicdeficit