Thursday, August 27, 2015

Deficit too small? Then how'd we get a 3.7% GDP growth rate?

Second quarter GDP just came out with a 3.7% growth rate. Not too shabby. But the deficit is supposedly too small,  so how did we achieve such a strong growth rate?

As Matt and I have been saying here, for the last two years: when top line government spending is over $4 trillion annually, that's a leading flow. That drives everything. The deficit is what it is. Looking at the deficit will send you astray and you will lose money. We're the only ones getting this correct.

It's not about the size of the deficit.

50 comments:

Random said...

Right. A key thing is that if the government spends money, it will get ALL of its money back eventually if there is no saving in the spending chain for any positive tax rate.

mike norman said...

Correct. It's the spending that counts. Or somebody else's spending. (Foreign sector, etc.) Nothing to do with the size of the deficit. That is a glaring mistake to be repeating that over and over and over.

Ramanan said...

Yeah the size of the deficit is not the thing to look at. It is endogenous. The exogenous things are government spending and the tax rate. Deficit can be low just because government spending brings in higher total taxes because of a rise in economic activity created by the spending.

Random said...

http://uk.mobile.reuters.com/article/idUKKCN0QW0SS20150827?irpc=932
Eurozone credit bubble? You may find this interesting.

Greg said...

" Nothing to do with the size of the deficit"

I think that overstates it a little Mike. Surely you don't think that the level of taxation doesn't matter.

I totally get your point but I think Mosler gets it too (I know this post is directed at him partially). He, for the most part I think, just uses the deficit language because that is the one that people get. However, you do have to admit that if Govt spending increases and taxes increase the same amount (as in we have "to get the money" from somewhere mantra) there is not nearly as positive affect as if spending increases and tax receipts stay the same (increasing deficit).

The problem is mainly a distributional problem. There is plenty of spending going on.... it just keeps going away from the people who can really use it (consumers).... but a nice middle class tax cut (eliminate SS tax without decreasing SS payments)could really unleash our economy.

I agree Warren sounds a little like a broken record, and I really like what you and Matt have done with the top line govt spending flows the last couple years but I don't think you guys are that much apart.

Random said...

It is always to do with real resources.
Remember tax rate cuts may lead to increased saving down the line ("higher deficits") but more spending overall and more real resources are utilised!
It takes longer for the govt to collect the spending as tax. Breathe in. Breath out.
Tax cuts/govt spending increases may or may not increase the "deficit." The point is, who cares?

mike norman said...

Greg,

Even if the US gov't ran a surplus (taxed more than it spent) if the foreign sector was a net spender, then the non-gov't, here, could still have a surplus. (In foreign currency, however.)

I'm not saying that's gonna happen anytime soon because Rest of World is a net saver, but it could happen. All I am really saying is that looking at the deficit is wrong and people saying this should stop saying it and admit they have been wrong for years.

Just like, "makes the currency harder to get" nonsense, too.

Unknown said...

I`m a long time fan of both the work/comments on this site and Moslers.

I think a key point is that forecasting is rather hard (50% get it right, 50% get it wrong), and the point made by Mosler is that all else equals (never happens), a surplus or lower deficit, depending on the foreign sector, will eventually increase the likelihood of a recession or downturn. Another way of looking at it is the boom will end sooner than else.

Not trying to take anything away from either of you, as you`ve had some pretty good calls.

Ignacio said...

You can go even further away: why does the GDP matter? Stop obsessing over the GDP, is not a useful metric. Can't wait until is dumped.

This only matters for those in finance (like Mike), so they can say: "hey look, we got amazing growth, stocks are going higher!".

Soon we will be under feudalism (going there already in Europe) and economists will be telling us it's raining while pissing in our faces with all this 'GDP is growing' rain dancing.

P.S: Only 40% of the population, in USA (worse in most other countries) hold stocks (directly or indirectly through 401K), and of that 40% only a fraction own stocks in any meaningful way. TL;DR: WE DON'T CARE IF THE GDP IS GOING UP, DOWN OR SIDEWAYS. The problem is of income and productivity gains distribution, not of growth.

Sick of economists.

Random said...

Full employment at living wage. About 3% "unemployment" but they will be on Job Guarantee. That is what we need. Who cares about GDP?

Ignacio said...

"Who cares about GDP?"
Economists and financiers. No one else cares.

In fact I would say that until GDP growth is decoupled from energy (it hasn't) and resource consumption, pushing for more growth is homicidal, irresponsible and sociopathic.

Just as I said in other thread: fix 50% of food being wasted before talking me about "productivity". in this case, fix distribution with our current production before talking me about producing more.

mike norman said...

GDP is just a metric, a measurement. We take measurements in life. How tall are you? How much do you weigh? How much money do you have in your bank account?

I agree that most measurements are meaningless to our lives and the way we live them. Having a job; a source of income is still important (for now).

So I agree with those comments about GDP, but don't shoot me, I was only using it to make a larger point.

Random said...

http://voxpoliticalonline.com/2015/08/27/known-number-of-deaths-while-claiming-incapacity-benefits-nears-100000/
Promote to post please.

Matt Franko said...

I,

Food "shortages" now down in Venezuela!

Maybe they should call Vladimir for some advice... dont see any food shortages over there in the face of the oil collapse. ..

Ignacio said...

"So I agree with those comments about GDP, but don't shoot me, I was only using it to make a larger point."

No offence intended Mike, still love your comments and blog. And I agree with you and Matt on this, narrow focusing on the deficit itself is pointless. At the end is a matter if funds are ending up on consumer hands to, well, consume.

But that's my rant about the GDP too: narrow focusing in the GDP doesn't matter either. Are the funds going where they should go? I'll let the economists answer that one, and then they can keep saying with a straight face that GDP is growing 3% and see if that matters anyway.

TL;DR: narrow focusing on deficit size: wrong. narrow focusing on GDP growth: wrong too. GDP is only useful if accompanied by other metrics (maybe that's what Mosler should be saying instead...) improving.

Ignacio said...

Matt, and there is also GDP growth in Venezuela ;)

Tom Hickey said...

"Size of the deficit" just means that government needs to increase (decrease) spending based on economic conditions in terms of what the other sectors are contributing. Neoliberals look to the external sector instead.

"Economic conditions" means the length of the unemployment line, and that is not well measured by the U3 "unemployment rate." It's necessary to dig a lot deeper. for example, PRC estimates that the US is now still experiencing depression level unemployment in the sense of people who want to work at their level of qualification and cannot find a job opening.

Tom Hickey said...

GDP is measured monetarily rather than in actual production, which assumes that the monetary figures accurately reflect what is happening in the real world. But they don't, even when GDP is adjusted for inflation. GDP is different from measurement of what is actually produced and who gets it. Per capita GDP is a joke in this respect.

When that is analyzed, it turns out that rationing by price is a crappy way to allocate resources socially, both wrt effectiveness and efficiency. Vaunted market forces don't work as advertised, and the "invisible hand" is really the very visible fist.

Humans are not only wasting resources on a vast scale but fouling the nest while doing so. It's incredibly dumb.

Ignacio said...

Tom I was reading some comments at Pettis site yesterday, some regarding labour participation in the US and trends, very worrisome:

http://data.worldbank.org/indicator/SL.TLF.CACT.NE.ZS/countries/JP-KR-US-ES?display=graph

Take in mind the demographic pyramid of all the 3 countries vs. USA is radically different (hint: all the other 3 countries have a steeping ageing population, while USA has many more young people in comparison).

http://populationpyramid.net/united-states-of-america/2015/
http://populationpyramid.net/spain/2015/

Not getting into the quality of the jobs anyway (as in that regard the other countries are probably in a similar position, or even worse in the case of Spain, although must say that the wroth of waitress jobs in USA is relatively similar to that of Spain probably lol).


No shit Trump is getting so popular...

Ignacio said...
This comment has been removed by the author.
Tom Hickey said...

"Food "shortages" now down in Venezuela! Maybe they should call Vladimir for some advice... dont see any food shortages over there in the face of the oil collapse. .." The difference in scale of the two economies and their potential is huge. It's not an apt comparison. Sanctions affect a country like Venezuela much more acutely than Russia. There are actually food shortages in Russia owing to the reverse sanctions imposed on the sanctioning countries. However, that is the result of a planned exclusion for import substitution by rebuild Russian agriculture, as well to diversify supply by cultivating commerce among emerging nations. Venezuela can't really respond on that level at all. They pretty much have to depend on the Chinese and Russians bailing them out. Brazil is potentially a different story since the scale is much larger. But Brazil is a mess politically. There;s been a de facto civil war going on there for decades. on Deficit too small? Then how'd we get a 3.7% GDP growth rate?

Jose Guilherme said...

Perhaps we could put it this way: when GDP is below potential and there is unemployment of resources, then we know the budget deficit was too small.

The 3.7% GDP growth rate was positive, but insufficient. The U.S. still has unemployed resources. A higher deficit (as a consequence of lower tax rates or more government spending) likely would have meant a higher GDP growth rate.

GDP growth is a good metric of the general health of the economy. It's more objective and less subject to manipulation than the more recent and fashionable HDI measures. However, it does not tell us anything about other key aspects of the economy and society, such as the distribution of income. It was never meant to do that, anyway.

Roger Erickson said...

Don't forget that what is & isn't counted as reported fiscal deficit is increasingly a political statement.
http://mikenormaneconomics.blogspot.com/2013/10/outlays-of-off-budget-federal-entities.html

Several automatic stabilizers (I forget which, SocSec? unemployment benefits? Medicare benefits?) have simply been declared "Off Budget."

Hence, the translation for "Track Topline Federal Spending" = "Our Congress no longer tells us the relevant truth about fiscal budgets." :(

Last I heard, no one can decide how much of the NSA/CIA spending is on or off-budget either.

For those reasons alone, I no longer believe that US Gov Inflation statistics are believable - any more than China's are. And the USA data dumps are far and away better than anything available in any other country!

Still think economics is a science? Or definable engineering?

If so, then so is dog training.

We're completely at the mercy of our masters who set policy & decide what data we get. Most of them don't seem to know what it means, or why it has meaning, either.

Jose Guilherme said...

Brazil is potentially a different story since the scale is much larger. But Brazil is a mess politically

Yes, Brazil is different in the sense that it is an agricultural power house.

Politically, however, it is not exactly a "mess". On the contrary, there is a wide consensus among political forces right and left that the country may run out of money, that the public debt is too large and must be reduced and that a recession caused by recently introduced austerity policies is an inescapable necessity to restore internal and external "balance".

While MMTers are a small yet vocal minority in the U.S. they are - alas - virtually unheard of in Brazil.

Joe said...

"It's not the size of the deficit that matters"

true, it's the amount of total spending that matters.. I think when people talk about the size of the deficit being important, they're assuming/implying that households are reluctant to spend, in which case it is the size of the deficit that matters since it's taking up a lot of the slack when it comes to overall spending. And households typically like to earn more than they spend, so that too requires a deficit. So there's two factors at least, total spending and instantaneous flows..

So the economy could grow with Clinton's surplus, since households were spending, in fact, spending more than they earned, it was credit expansion driving it.

But it seems wholly correct too to say that the deficit "supports" the economy. And a surplus would clearly be a drag force on the economy. objections anyone?????

Broll The American said...

I always hated GDP for the reason that a major component is politically arbitrary. Net Government spending is decided by policy, not with anything to do with the actual economy. If the actual economy is in the crapper, but the government runs a huge deficit, you could get a growth number. The same underlying facts could remain while the government runs a surplus -you'd get a negative number. How is this really indicative of the economy?

Matt Franko said...

Tom the sanctions only effect 7 people down there:

https://www.whitehouse.gov/the-press-office/2015/03/09/fact-sheet-venezuela-executive-order

what about the others iirc they have over 30M....

Toilet paper was the canary in the coal mine... you knew it had to go over to food eventually...

Ideological examinations cannot help... their problems are in real terms...

rsp,

Tom Hickey said...

The problem is that under a neoliberal world order nations either "play by the rules set by the United States," to quote Barack Obama, that is the neoliberal elite, or face economic obstacles even if the whole country is nationalized and run as a command economy by geniuses because no country is completely self-sufficient and depends on trade, which is conducted under the rules set by the US.

The only lasting remedy is replacing the liberal economic system with another system globally. This is the aim of Trotskyism, for instance. In my view political action is less likely to happen than system collapse, which we are already seeing the beginnings of in Greece, the water conflicts in Central Asia, food shortages that led to the Arab Spring and the Egyptian revolt, the waves of migrants hitting Europe, and the other consequences of neoliberal overreach, what Pepe Escobar calls "the Empire of Chaos,"a new arms race, a renewal of the Cold War, hot war in the Middle East and Eastern Europe, and the tightening vise of climate change.

This is not working. Venezuela is a symptom of that, and regime change that puts the neoliberal elite back in power so that everyone can have toilet paper again won't change that.

Unknown said...

The point about the deficit is that its a means of increasing spending either directly (G component of GDP) or indirectly (C and I via transfers and\or tax cuts), and its vital within the sectoral balance framework.

Yes, the private sector can drive the spending via a debt led deficit resulting in a Govt budget surplus. But thats a horrible way to run a society and can only end in a recession and\or stagnation.

And yes, the USA could theoretically be a big net exporter, but again thats a horrible way to run the USA and would only accomplish making ourselves poorer in real terms.

Yes, Warren's GDP calls have been way too bearish since the fiscal cliff. Its actually been surprising to me as well that the domestic economy has managed this much growth given the problems we've had in Europe and a reduction in income to the private sector of $1 trillion this year alone due to Govt policy, relative to 2010. And we certainly know that a large shift in national income shares back towards labor has not occurred, so maybe you can grow an economy on the backs of the top 5% :)

Matt Franko said...

Auburn commodities are in the toilet in USD terms... this helps the broader economy.... makes things cheaper and leaves income in households for spending on other things ... rather than go towards savings of people extracting monopoly rent thru oil and saving it..

Were paying $2.49 around here for gas... rsp

Matt Franko said...

"and a reduction in income to the private sector of $1 trillion this year alone due to Govt policy"

Auburn no way has that happened. .. incomes are being sustained by a consistent 4T of govt spending for the last few years

Unknown said...

Matt-

The private sector was getting $1.4T in net income per year and now its less than $500 billion. Thats a big deal. Or are you saying that if the deficit was $1 trillion larger, that wouldnt help GDP via G, C, or I? Because it wouldnt make any sense to say that.

Unknown said...

Matt-

But there is no doubt that lower oil prices are helping to relieve the burden of increased taxes via FICA increase, Bush tax cut expirations, lots of tax increases in Obamacare, but oil only dropped in Q42014.

The biggest thing that replaced the govt deficit while maintained 2.5% growth has been private debt.

https://research.stlouisfed.org/fred2/graph/?graph_id=237296&updated=8722

Unknown said...

Private debt growth was negative until the the start of 2013 and the beginning of the real austerity. So again, its the private debt growth that allows the govt's deficit to shrink without going into recession. Population growth via immigration and wrastling w\ the mrs helps keep GDP growth positive also, which is why using GDP w Japan is misleading, its crazy to expect lots of nominal spending growth with a shrinking population

Matt Franko said...

If the govt cut spending by 3T down to 1T and eliminated all taxes (Laffer) the economy would collapse.... Deficit would go up from here to 1T....

Savings of current year govt spending used to be 1.4T now it is 500b so people are saving less of current year govt spending... This would support an increase in credit which we can see it has... It's the decrease in savings that supports the credit increase not the credit increase that supports savings of govt spending...

Govt spends first.... To do a reserve loan you first have to do a reserve add....

Unknown said...

Matt-

Sorry brother but your argument is not making any sense. Society would look seriously different (and it wouldnt collapse) if the Federal Govt shrunk by 75%, even if federal taxes were eliminated but that wouldnt have any bearing at all on your deficits dont matter nonsense.

"Savings of current year govt spending used to be 1.4T now it is 500b so people are saving less of current year govt spending... This would support an increase in credit which we can see it has"

This is backwards, shrinking govt deficits dont support private credit. Govt liabilities support private sector liabilities, and its the private credit growth (and the resultant spending) that causes the automatic stabilizers to shrink the Govt deficit. You've taken this deficits dont matter, Mike and I have found the holy grail meme to a weird place.

Your last line is irrelevant to the discussion.

Unknown said...

Matt-

So you must have been calling for a banner GDP growth year in 2008 because federal Govt expenditures grew at a decades high level of 10%. And you should have been bearish for the last 4 years seeing as 3 out of the 4 years govt spending actually shrunk nominally, something that had never happened before since the 1970s. The data does not support your position that Govt leading flow is the most important economic factor and indicator.

Jose Guilherme said...

Maybe we could sum up this way the possible actions of the private and public sectors and their consequences on the economy and the deficit:

Private sector spends less - GDP down, budget deficit up.

Private sector spends more - GDP up, budget deficit down.

Government spends less - GDP down, budget deficit down.

Government spends more - GDP up, budget deficit up.

Matt Franko said...

"shrinking govt deficits"

I'm not the one talking about an ex post accounting result in the present tense....

Dan Kervick said...

"If the actual economy is in the crapper, but the government runs a huge deficit, you could get a growth number."

Not all government spending is counted as part of the GDP figure Broll - only the parts that are a form of consumption spending or investment spending. Transfer payments are not counted. When automatic stabilizers kick in they are not counted as an increase in GDP. Only if those transfers are actually spent by the recipients on national product do they get reflected in the calculations.

Matt Franko said...

No one is saying its the holy grail its near real time representative of VERY important actions the govt institution is doing that create foundational and important economic activity...

Accounting results are abstractions and not causal...

Agents dis-saving (human action) can be causal, govt agents spending more (human action) can be causal...

btw 2008 wasnt a bad year if you weren't in or around the improperly regulated financial sector... high oil, high Ag, cell phones, education industry, medical services, homeland security, GWOT, etc...

The MMT people tell you that the deficit is ex post record of savings of period govt spending, ok, then when you see it go down from one time period to the next, then you know savings of subject period govt spending decreased... so how do you get from there to "we need higher deficits!" they are saying "we need more savings of current govt spending!" how does higher savings of current period govt spending foment an increase in economic activity? Confidence fairy? Loanable funds?

Unknown said...

Matt-

Its not about the savings, its about the spending. If you need more aggregate spending, increase the deficit and GDP will go up either directly through through C and I. And the deficit numbers are largely in real time as FICA is 50% of all taxes collected by the Federal Govt and we get that information on the daily tsy statements just like the spending info.

Unknown said...

directly through G or indirectly through C and I

Unknown said...

Matt-

"so how do you get from there to "we need higher deficits!" they are saying "we need more savings of current govt spending!" how does higher savings of current period govt spending foment an increase in economic activity?"

From any starting point in time, any discretionary fiscal change will either increase or decrease GDP depending on whether that action increases or decreases the deficit. If the Govt increases purchases on real goods and services, G will increase both GDP and the deficit. Increasing govt spending via transfers will increase the deficit and C and\or I under almost any circumstance because there is a very low probability of people saving 100% of the new income from the transfers. This same thing applies to tax cuts. Even rich people didnt save 100% of the additional income they kept as a result of the Bush tax cuts. Thats why all fiscal action has a positive GDP multiplier.

so to say that we need to increase the deficit is simply a way of saying that we need to increase aggregate demand without recommending any specific policy to do so (increased G, transfers, or tax cuts).

So thinking about it in terms of "private sector saving more of current govt spending" completely confuses the whole issue. The sectoral balances is a zero sum framework, so from one period to the next, any time one sector reduces its spending, by definition in order to maintain a constant amount of total spending some other sector(s) must have increased its\their spending. Once again, the relationship between the deficit and the economy is not about the savings you see displayed in the ex post accounting, its about the future period spending decisions necessary to maintain aggregate spending at a level that is consistent with society's goals of macro production.

Tom Hickey said...

It is a about saving. Saving is demand leakage. The objective is to keep circular flow at optimal use of available resources to reduce idle resources, which is a form of waste (economic inefficiency). The purpose of the deficit, which increases nongovernment net financial assets in aggregate, is to provide a net saving vehicle independent of the endogenous creation of money through non-government lending, which much sum to zero.

The fiscal balance is really a buffer that ideally expands and contracts with changes in the propensity to spend/propensity to save ratio. As the propensity to save increases, demand leakage increases and the economy contracts unless the flow away from spending to saving is offset.

The problem as Minsky pointed out is that an endogenous money system is unstable owing to the financial cycle. This means that capitalism is unstable. The system needs to be stabilized exogenously and that's the task of the fiscal balance acting as a buffer. Otherwise, the desire to increase net saving endogenously leads to unsustainable net borrowing (summing to zero).

The key is circular flow at optimal use of available resources, which is best measured by employment according to MMT, and that doesn’t mean just looking at U3 but rather analyzing the entire employment picture. The MMT JG goes hand in hand with the fiscal balance as a buffer by mopping up residual unemployment by guaranteeing a job offer at a living wage to all who are willing and able to work.

That's MMT based in Lerner's functional finance and Minsky's financial cycle/financial instability hypothesis/JG in a nutshell. Godley's SFC macro analysis based on sectoral balances just explains the macro. It's not meant to be used operationally other than in cases that the automatic stabilizers are insufficient to the task. Then the fiscal authority needs to step in ad hoc with appropriations addressing the specifics.

geerussell said...

I see two strands of argument here. Matt saying that gross govt spending is important because it's economically "active", mobilizing real resources on real activity. Employing people, building things... carrying out public purpose. Auburn Parks saying that net govt spending is important because it furnishes net financial assets to the private sector in aggregate allowing it to achieve its desired savings without contracting its spending (likely slowing the economy) or racking up private debt (adding to financial instability).

Seems to me you're both right, consistent with each other, with the accounting, and with MMT. Just my two cents though, I could be mis-reading either/both/all of it.


Anonymous said...

Geerussell, that's my take on it. For me, Warren's comments on his blog are more of a "Where's Waldo" scenario. WRT the political, if the fiscal were wielded in a more competent manner, then not so many people up in arms, the fringe political groups starve for want of manna.

Jake C said...

I don't get this.so the gov is spending 4T into the economy.so that's a "leading flow". But what if it is taxing 4T back out of the economy?
Isn't that the whole raison de etre of sectoral balances and MMT?

Tom Hickey said...

It's the flow that counts. That's why the targeting of spending and taxing is important.

What if taxes are hitting what would be saved rather than spent and spending is targeted to the places that will most increase turnover hence broad demand.

Jake C said...

What would be an example of spending that would most increase turnover?

But taxes on income or payroll could of been money spent or saved?how can you tell.

So it wouldn't even matter if the gov spent over 4 T and taxed back in 8T.what's special about about the 4T figure?