Sunday Sermon: In Defense of Deficits

Well, I suppose the snarky response is that your household doesn’t have direct control over multiple battle carrier groups. Joking aside, the fixation on reducing budgets is essentially the economic equivalent of flat-earthism. James Galbraith, in a must read piece, spells out why public deficits are necessary:

To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.

So why not have banks–private loans–be the primary stimulus? Well, unless you’re a bank, it’s not a particularly good thing (italics mine):

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.
And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.

Banks do have a purpose–when constrained within reason. They are quick and nimble, and much better at determining the appropriateness of small scale, local spending increases (loans). Loans also shift resources from consumption to investment.
For those of you worried about runaway deficit interest payments, they would serve as a massive stimulus:

A recent projection from the Center on Budget and Policy Priorities, based on Congressional Budget Office assumptions, has public-debt interest payments rising to 15 percent of GDP by 2050, with total debt to GDP at 300 percent. But that can’t happen. If the interest were paid to people who then spent it on goods and services and job creation, it would be just like other public spending. Interest payments so enormous would affect the economy much like the mobilization for World War II. Long before you even got close to those scary ratios, you’d get full employment and rising inflation–pushing up GDP and, in turn, stabilizing the debt-to-GDP ratio. Or the Federal Reserve would stabilize the interest payouts, simply by keeping short-term interest rates (which it controls) very low.

Anyway, as the kids say, read the whole thing. There’s a lot of good stuff in there.
And, as a bipartisan sop, I would note that Democrats, in practice, are as bad about deficit reduction as Republicans, perhaps worse in that Democrats actually try to reduce deficits, whereas Republicans increase deficits (although by spending the money very poorly, in tax cuts to the rich) even as they claim to be ‘fiscal conservatives.’

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13 Responses to Sunday Sermon: In Defense of Deficits

  1. Tyler DiPietro says:

    The first paragraph you quote is false, growth can (and usually does) come from the disposal of private savings. That’s why the mass of unrecoverable debt in the private sector is a terrible thing.
    “For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like.”
    I’m no opponent of fiscal expansion, but the reasoning here is risible. There’s no such thing as a free lunch, the public is still on the line for public sector debt in the form of A.) inflation and/or B.) taxes. Granted, public sector debt isn’t as much of a problem right now since both short and long term interest-rates are so low, but saying that we have the money “free and clear” is dangerously aneconomical thinking.

  2. Tyler DiPietro says:

    “If the interest were paid to people who then spent it on goods and services and job creation, it would be just like other public spending. Interest payments so enormous would affect the economy much like the mobilization for World War II.”
    This is even worse reasoning. First, because most of the debt service goes to bond holders in foreign countries. Second, because the debt service would either result in an increase in taxes or an increase in the monetary base, resulting in inflation. That’s why fiscal expansion should only be used when the economy suffers from excess demand for liquid assets.
    Sorry Mike, but somebody who buys this kind of free lunch thinking has no businesses dismissing anything else as “flat-earth economics”.

  3. Captain Patriot says:

    “Democrats actually try to reduce deficits, whereas Republicans increase deficits (although by spending the money very poorly, in tax cuts to the rich) even as they claim to be ‘fiscal conservatives'”
    That may be true to a certain point. However, Obama has spent more money in one year than Bush did in 8 years. He has spent more money than any other leader in history and in histoical time- 1 year. His HELLthcare mandate thingy will more than double the deficit alone in 10 years.
    I am a fiscal conservative but do not consider myself totally Republican since they have betrayed their party’s values so many times. I am more independent than a Repub or Democrap. I am more in line with the Tea Party Movement – throw the bums out of both parties, take over, and return the country back to its orginal founding principles and let the constitution prevail. To hel with socialists and nutjobs liberals and treasonous republicans.

  4. Roland says:

    “A national debt, if it is not excessive, will be to us a national blessing.” -Alexander Hamilton
    But today’s US Deficit is definitely excessive. The money spent on the military-industrial complex is sorely needed elsewhere: infrastructure and healthcare, for instance.

  5. Troublesome Frog says:

    That may be true to a certain point. However, Obama has spent more money in one year than Bush did in 8 years.

    I would dearly love to see you do the math on that one. Hint: You probably shouldn’t do too much armchair quarterbacking on public policy if you’re also completely out of touch with reality.

  6. Min says:

    Tyler: “This is even worse reasoning. First, because most of the debt service goes to bond holders in foreign countries. Second, because the debt service would either result in an increase in taxes or an increase in the monetary base, resulting in inflation.”
    Mike has addressed your first statement. As for the second, it is plausible, but I believe that history does not bear it out. The question of future taxes is political, and the most likely case in which future taxes would increase is a recovery and a healthy economy in which people can afford the taxes. As for inflation, an increase in the money base does not necessarily increase inflation. That is especially true when the economy has a lot of slack, as it does now, with high unemployment.

  7. Rob Monkey says:

    And *gasp*, it might lead to higher taxes!!!!! Oh Noes!!!! All those poor (oops I mean rich) people who got Dubya’s tax cuts might actually have to pay taxes again? You mean they might start paying slightly more than half the taxes I pay, even though I work for a living and they collect capital gains income? And in the end I might have roads that aren’t 90% pothole, internet service expanded to everyone, and public universities with kickass funding? Sheeeeit, line the plutocrats up and I’ll personally go through their couches for loose change. Because in the interim, while Tyler’s pissing his libertard pants about billionaires turning into hundred-millionaires, thousands of workers will be employed to do these big jobs, and since public works like that are some of the few jobs that can’t be easily shipped off to India, those jobs will provide income to people here. And then, people will take this “money,” as I believe it’s called, and purchase goods and services with it. This “spending” will cause an economy to grow (private as well as public) as more people can afford to raise their standard of living. Ow, FUCK, rationality hurts!

  8. Mike, you’re right that I made a mistake in assuming that the majority of treasury security holders were in foreign countries. That was incorrect. But you’re still arguing for a free lunch. The fact that we have a reserve currency doesn’t absolve us of the dangers of currency depreciation and exchange rate dynamics. There is a point at which people will stop buying U.S. debt, just like there is a point at which people will stop buying anything. The fact that we’re still reasonably far from that point is irrelevant. Galbraith is essentially arguing for the economic equivalent of a perpetual motion machine.
    “The question of future taxes is political, and the most likely case in which future taxes would increase is a recovery and a healthy economy in which people can afford the taxes.”
    And that’s all well and good, but the money still has to come from somewhere. There are no free lunches.
    “As for inflation, an increase in the money base does not necessarily increase inflation. That is especially true when the economy has a lot of slack, as it does now, with high unemployment.”
    And increase in the monetary base doesn’t cause inflation during a liquidity trap scenario because demand for currency is higher, so supply has to be adjusted accordingly. That doesn’t mean that you can have an infinitely elastic supply of money without currency depreciation and thus inflation.

  9. “Because in the interim, while Tyler’s pissing his libertard pants about billionaires turning into hundred-millionaires…”
    Not a libertard, a liberal and fairly standard neo-Keynesian describing economic reality. But feel free to continue you’re inane, ignorant gibbering. I won’t stop you.

  10. Min says:

    Tyler: “There are no free lunches.”
    Indeed, there are not. But that is not what is being claimed. Remember the Laffer Curve? It is possible for tax cuts to produce greater taxes. Sounds like a free lunch, doesn’t it? But it isn’t. If the tax cuts stimulate the economy, more taxes may be collected at a lower rate.
    Similar considerations apply with fiscal stimulus, especially with reducing unemployment. With the Laffer Curve we may not be sure where we are, so tax cuts are something of a gamble. But right now we know that millions of people are out of work. We know that businesses are failing because of a lack of customers. And we know that putting money into the hands of poor people and currently unemployed people means that they will spend a lot of it, unlike what happened when we gave a lot of money to the big banks. When these people become customers, businesses can stay in business, make their payrolls, and some of them can even hire more people. None of this is a free lunch. People go to work and produce goods and services for other people. That’s what we need now, and to withhold funding because of fear of future taxes is being penny wise and pound foolish.

  11. BaldApe says:

    Captain Patriot,
    The only way that is even close to non-delusional is if you count the rich banker bailout, which was passed
    (wait for it)
    under Dubya!
    And Min, the only thing I remember about the Laffer curve is that it is only true at the extremes. Wherever we are in that continuum, we are certainly not near 100% or 0% income tax rates. Therefore it is functionally BS.

  12. Benedict@Large says:

    I know I’m late to posting here, but…
    I am always amazed at the resistance of the neoliberals to simply pick up a ledger and do a little double-entry bookkeeping. They “know” they’re right. It’s “intuitively obvious” to them.
    I also know that the earth is the center of the universe and big rocks fall faster than small rocks. It’s intuitively obvious, after all.
    What? Simple math proves otherwise?

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