tjfxh June 5th, 2011 at 7:22 pm
In response to Economic Policy Institute @ 106
Larry wrote: “I don’t agree completely with Jamie Galbraith’s and R Wray’s position on deficits (i.e., they never matter)”
It not the case that Galbraith, Wray and cohort say “deficits never matter.” That was Dick Cheney. They specify precisely HOW deficits matter. This is determined by sectoral balances and national accounting principles wrt macro.
The government fiscal balance, the domestic private balance and the external balance sum to zero as an national accounting identity. That is Macro 101. So if the domestic private balance is in surplus (S>I) and the country is running a CAD (foreigners saving in the nation’s currency), then the government fiscal balance must offset the demand leakage to saving or else private saving desire cannot be met.
As long as the US is deleveraging and rebuilding savings and also running an external deficit, the government fiscal balance must offset that leakage. Otherwise, either economy contracts, private debt increases, or the private sector draws down savings/sells assets. In a deflationary environment such the US now experiencing, this can result in mounting defaults and classic debt-deflation.
If there is insufficient fiscal offset of demand leakage to saving, as is the case now, then the economy will underperform and unemployment increase, Thus, we see that deficits have a very specific purpose and their appropriate size is determined by fluctuating saving desire.
Moreover, these economists say that the problem is never financial but real. As long as there are real resources available for purchase, the government can always fund their purchase. The balance between public and private is a political matter, but the government’s ability to fund its purchases is never an issue when it issues a non-convertible floating rate currency.
The only contraint on the government’s ability to fund itself as it wishes is the availability of real resources wrt money supply. If more money is created than the economy can expand to produce real resources to meet this demand, then inflation will result. As long as there is unemployment, the economy is capable of expanding and demand side inflation is remote. (This does not mean that supply side inflation cannot occur, e..g, due to an oil shock or natural disaster. But this is an entirely different matter.)
There is no problem with deficits in the short term, and the long term issue is a political one, that is, how the country decides to allocate its real resources wrt public purpose in the future — how much to defense, how much to health care, how much to the safety net, how much to infrastructure, etc. Decisions taken now will affect the quantity and quality of real resources in the future. Inappropriate concern with deficits and debt, which are pseudo-problems, will simply set the entire country back, and everyone will be worse off than otherwise.