The point is that more than 90 percent of the rise in the deficit relative to pre-crisis projections is related directly to the crisis — and probably that’s true of the other bit too, although it’s harder to show.Read it at The New York Times | Conscience of a Liberal
Sources of the Budget Deficit (very short)
Paul Krugman
16 comments:
Completely unenlightening from Krugman here.
He is talking to the people that are blaming the president for increasing govt spending to unprecedented levels when the deficit resulted from falling tax receipts and increasing automatic stabilization, as is to be expected counter-cyclically.
The tax rate was too high under the circumstances and the automatic stabilization too low. A better design would have resulted in the larger deficits that were needed to offset falling income and increased saving/downgearing. Even the stim was not enough, as Christina Romer said at the time and was overruled by Larry Summers. The president likely never even saw her proposal. PK doesn't go that far in this short piece.
The whole piece is from the context that "the deficit matters". (I guess it does to him).
And we have to worry about the deficit as if it had to be "paid back" or something.
He is still a long way from understanding this part of macro...
rsp
couldnt it be said that by not having an adequate deficit to support the private sectors desires, that could be called "unsustainable" are we living in seinfelds bizzaro world?
DAve "couldnt it be said that by not having an adequate deficit to support the private sectors desires, that could be called "unsustainable" are we living in seinfelds bizzaro world?"
Exactly. This has been explained to PK over and over.
I guess I see PK's short essay in a different light. I am well aware of his lack of understanding of MMT and I'm not really defending him. But the deficit, as you well know, Matt, is not actually irrelevant. In fact, we spend a lot of time talking about it on the MMT blogs, just from a completely different pov. (Mainly that is a result of policy, not a policy choice.) When I think about PK's audience, maybe his point for them is a good one. Most people don't seem to know how the deficit is actually created. To them, cutting the deficit is just a matter of raising revenue or cutting spending, like a household budget. They don't get the role of the automatic stabilizers. If we are going to successfully educate the public on how our monetary system works, we can't just try to relegate the deficit to insignificance. The neoliberals have focused too much attention on it. So for most people, the deficit "matters". I think PK's essay is a small piece of educating people as to the what the deficit really is and how it is created.
"... reform of the financial system is not enough. Fiscal reform must accompany financial reform: the reform needs to be on both the revenue and the spending side. On the revenue side an "in principle" balanced budget must be achieved. This means that a tax system needs to be in place which will not only pay for current operations but will also pay interest on the public debt: "Ponzi" financing by the government needs to come to a halt. Even though the government, unlike private institutions may not exhaust its balance sheet equity, Ponzi financing by government means that an inflation tax will in time contain the real size of the government debt. The threat of an inflation tax means that private long term debt financing needs to be at rates that compensate for the expected erosion of the purchasing power of the principle due in the future. This inflation premium in interest rates is in fact an amortization of the principle." (Minsky, 1992, WP 72)
...
"On[e] reason why the massive deficits of the Reagan years did not lead to a buoyant expansion was that the revenue system had been compromised. This meant that the increases in the government debt was not a one for one increase in liquidity. A fiscal system based upon an in principle balanced budget is a way of assuring that a period of government deficit financing is followed by a period in which buoyant private demand does the job." (Minsky, 1992, WP 72)
Anon,
Right.. I think this maybe is why Warren Mosler has I believe stated that he has never read Minsky...
John,
"But the deficit, as you well know, Matt, is not actually irrelevant"
I guess it could be looked at as revealing John.... iow, we probably would like policymakers to be proactive but say even so they "get it wrong" sometimes... some time goes by and they look at this ex post data (ie the deficit) and the deficit goes high, the trade deficit soars and unemployment goes way up output is way down.
So they should look at this ex post data (the deficit) and say to themselves: "hey we got this way wrong"... "savings desires are soaring both domestic and external as evidenced by the high fiscal deficit and trade deficit"... "this is evidence of major league demand leakage" .... "hey we need a major fiscal adjustment pronto via a bottom-up tax cut/tax rebate and/or some direct stimulus and/or some trade policy adjustments" ...
So this is how I could see that "the deficit is relevant" but not because we would have to "pay it off" someday ....
This is not how Krugman presents it though... we need someone like him to figure this out and then start to publish in THIS context to help change the public perception of the deficit as exclusively "a bad thing"....
rsp,
I think Minsky's bigger point in the quote above is to offer a more structural account of inflation when government spending is not well-targeted and capacity/production/social consumption oriented. That is, education, infrastructure, etc. versus spending such as on demoralizing transfer payments for those that CAN work which doesn't add to increased output or consumption goods and gets tied in with "overhead" in the economy.
(that's pretty rough, but that's what I was thinking; could be wrong and apologies if so)
Matt -- That's about my thinking. The deficit projections and results are useful in telling us how the sectoral balances are working out. But, people need to understand how the deficits are affected by things like the automatic stabilizers and the other sectors' spending decisions. Then they will, hopefully, understand that the deficit is result of policy, not something that can be targeted by the government budget.
Anon -- Why do so many people believe that transfer payments are demoralizing? I see this throughout the conservative commentary, and I just don't understand it. Not having a job and being able to comfortably support your family is very demoralizing. Receiving some minimal amounts of unemployment compensation or food stamps does not, I believe, add to that.
Of course, if the government did spend more on productive pursuits (infrastructure/education/consumption) then you would expect transfer payments to decrease and a JG could soak up the relatively few remaining unemployed.
John Z. "Why do so many people believe that transfer payments are demoralizing?"
The best I can make of this — and I have heard it from many to make that assertion — is that if TINA then people would either accept any wage for any job, so wages and prices would fall together and the economy would reset, or they would become entrepreneurs and create new businesses.
The first case is the agenda of the ownership class and the second is just magical thinking.
Tom and Matt,
I've been trying to wrap my mind around WHAT exactly MR is saying that MMT is mistaken about regarding money creation. Can you comment on the following…
If it's true that the U.S. government uses bank-money in the process of creating new net financial assets, does deficit spending (creation of new net financial assets) DIRECTLY lead to increased aggregate demand? Or… does it merely improve the balance sheet of the private sector, essentially making the private sector more "credit-worthy" …thereby indirectly increasing bank ability to expand credit creation?
It seems that credit-creation by itself is like a 'house-of-cards' …that sooner or later it will collapse from the weight of compounding interest. BUT…. what deficti spend (creation of new net financial assets does), is constantly change the composition of money in existence… so that the house-of-cards doesn't collapse.
From this perspective, did the recent housing bubble/financial crash occut because creation of new net financial assets did not "keep up" with credit expansion?
Thanks.
JK, all that macro treats is at the level of aggregates. The sectoral balance identity makes it clear that if the govt doesn't run a full employment budget that offsets non-govt saving desire then either inflation will occur if on the high side or economic contraction and UE will take place if on the low side. The issuer of a non-convertible floating rate currency has ample policy space to deal with this through fiscal policy.
Of course, that is not the end of it and MMT doesn't end there wrt policy recommendations, e.g., for institutional reform to reduce financial instability.
Once all political factions understand the constraints and how the appropriate size of the fiscal balance is determined, then they can all propose alternative policy options for voters to consider.
The chief constraint on an economy is continued availability of real resources. MMT analysis shows how "affordability" is never the constraint. Price stability and employment are constraints, and continuing availability of real resources requires investment, both private and public.
How public investment is handled is a political question, and the criteria are effectiveness and efficiency. Effectiveness is about achieving goals, and different factions have different ideas about policy objectives.
Tom -- Thanks, that makes "some" sense. So, it's really about the neoliberal agenda and not something real. Certainly it's a putdown and reinforces the lazy unemployed meme. Once more, it's the framing.
"Once more, it's the framing."
Exactly, "expansionary fiscal austerity" is all about cramming down the middle class and liquidating the poor. The upper classes used to call the lower class "the proles". New they call them "the eaters."
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