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)…
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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)
To what extent is the current growth in private savings occurring primarily among the top 1 percent? These generally aren’t the people who are sacrificing consumption to rebuild savings. Aren’t we borrowing their excess income instead of taxing it?
PJR, no doubt the current growth in private savings is occurring among the 1% and the multinational corporations…and we could certainly object to borrowing their excess income instead of taxing it…but you have to understand where this riff was coming from; i was trying to correct the “misunderstanding about our fiscal situation” which you’ll see if you click the link, goes back to beverly’s post showing that the balancing the budget meme is just a sales gimmick to gut the federal government…it was that and the selling of the ryan plan that i was responding to, not trying to lay out a path for fiscal policy…
rjs I am guilty of agreeing and moving on to a thought that you provoked. Which is, if the GOP insists on cutting deficits, whose savings does the GOP insist on cutting?
PJR, you expect me to figure out the GOP’s thinking?
from every utterance i’ve heard, my guess would be that none of the congresscritters has an full understanding of the implications of their budget decisions…i’ll take that a step further to say that not even a notable fraction of the most vocal deficit hawks understand these sector balances either…at the most, some recognize that cuts to defense spending, for instance, costs profits and jobs, and hence a reduction of wealth on the private side…but should they ever prevail, i’ll bet a lot would be surprised by the unintended consequences…
however, some who pretend to be deficit hawks, such as greg mankiw, are lying through their teeth when they allege that the US is on the way to becoming greece or zimbabwe; as architect of the bush tax cuts, he shared Greenspan’s fear of the Clinton budget surpluses, and knew exactly what the tax cuts would do to the budget before they were enacted…
http://neweconomicperspectives.org/2012/05/playing-monopolis-monopoly-an-inquiry-into-why-we-are-making-ourselves-so-miserable.html
rjs your guess is my guess. I’d love to ask them the question and get past the quizzical looks in response.
The GOP raises deficit issues as a mechanism to oppose Dem spending priorities, not their own priorities. They don’t actually care about deficits. The media falls for it every time.
PJR,
“[W]hose savings does the GOP insist on cutting?”
Leave savings alone and tax financial assets like FDIC charges insured banks, and financial transactions. Collect more in tariffs.
US bailed out a lot of the holders of MBS’.
If the ECB and IMF could reduce (Cyprus) bank deposits to do an uninsured bail out the US G could tax wall st for the past bail out, and then some.