From Deficit to Debt
In the real world, if someone spends more money than they make, they run a deficit. Income – Spending = Deficit. Accumulatively, deficits become debt. In order to avoid the accumulation of debt; they need to either reduce spending, increase income, or both; a lessening of income would require a reduction in spending, an increase in spending would beg an increase in income, and so forth. Governmentally, spending stays spending and income becomes revenues (taxes).
Laffer’s plainly showed that if you chose the sweet spot at the top of a very smooth curve of tax rates vs tax revenues, revenues would be maximized. Ergo, up to some point, tax cuts would more than pay for themselves (some imagination is required). After Laffer, for some in politics, all came to be about the spending. And strangely enough, for some of these; somehow deficits caused by tax cuts didn’t matter (don’t even try). Meanwhile, back in the real world, deficits soared; so did debt.
With Laffer’s Curve in hand, some clever politicians, with a little nudge, came up with the idea of passing tax cuts for the rich with the promise that they would pay for themselves by growing the economy. Whether or not they really believed this; it didn’t happen. Instead, we got huge deficits that soon became $Trillion debts. This same clever lot now claimed that the only solution for these deficits and debts created by their tax cuts was cutting entitlement spending which is something they wanted to do from the start. Seems it was all a ploy. One that the media, perhaps unable to connect more than two dots, went along with. The ill-informed, and a bit too manipulable, working class wound up with the tab.
Yes sir. However, if we reduce public spending and also reduce deficits, then our surplus trading partners will have a shortfall in safe dollar assets to bolster US exchange rates and US consumers will have less income to feed the trade deficit monkey. Even if we do not reduce deficits and just keep lowering taxes, then rich people with more investment money in a world of lower corporate profits do not get higher returns. The bottom line is the more wealthy segment of US society is not always the smarter segment. Of course we already know this because wealthy conservatives have a long track record of unforced errors in economics.
Ron is making an important point here, in that the debt of one sector of the economy is the asset of another, and hence add up to zero….economists refer to that identity as sectoral balances, which i learned about here at AB when Rebecca Wilder used to hold court on the subject…in lieu of finding one of her old posts, i’ll just quote the Wikipedia article on the subject:
the article has a graph of that over our history. it’s clear that if one restricts the amount of government debt, one simultaneously will limit either the foreign sector surplus or the private sector surplus…if you want to shrink the economy, cutting government “debt” is the way to do it…
Good comment . . .
“debt” is such an unfortunate word to use to describe the hundreds of years of accumulated government fiscal imbalance….unlike the “debt” you or i might owe, the so-called government debt never has to be paid back…even the idea of “paying back” our treasury script is nonsense, since whatever one would use to pay it back with would just be another form of treasury script….
in fact, as Steve Roth showed here on AB years ago, the 6 times in our history wherein we reduced that so called debt, it resulted in a recession…it appears to be a bad idea to attempt to reduce the amount of treasury script outstanding…
the question should be do we really want to reduce the amount of treasury bills, notes. and bonds outstanding? since without that script, the global financial system would collapse…
It is an extremely deep question actually despite that even the most enlightened discussions of it are still superficial. The Internet may not even have the disk space capacity for it.
OTOH, the short answer is that it would be wonderful to run surpluses and reduce the debt, but just not unilaterally. So, while in and of itself reducing the debt would be great, it is also entirely unrealistic to do so in any many that would maintain coordinated economic balances in the US much less the entire world that depends upon US consumption for their required level of economic demand. IOW, only in my dreams.
“…in any manner…”
GOP wants cuts but won’t say what https://www.nytimes.com/2023/01/31/us/politics/republicans-spending-debt-ceiling.html?smid=nytcore-ios-share&referringSource=articleShare
It’s interesting trying to post using an iPhone from aboard a ship in warm seas … A great story in the NYT today about a new GOP sending fake M79 grenades to colleagues. Also one about how the GOP wants spending cuts but won’t say what, leaving it up to Dems to figure that out. Brilliant!!!
GOP won’t say what cuts they want
Fake grenades sent by new GOP Rep
As I recall about the M79 rounds they are activated after having rotated a number of spins after being fired from the launcher. So to find out if they are actually inert just turn them a few times (50?) and if they don’t go, you should be fine.
:<)