Saturday, January 30, 2010
Obama: Cutting deficit as important as job growth
"A sign of progress," Obama said in his weekly radio and Internet address. "But as we work to create jobs, it is critical that we rein in the budget deficits we've been accumulating for far too long."
"Reinstating this law [pay-go] will help get us back on track, ensuring that every time we spend, we find somewhere else to cut," Obama said.
He's got it totally wrong.
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5 comments:
If Mike Norman is suggesting that cutting the deficit is necessarily deflationary, then Mike Norman is wrong.
In that the deficit consists of financing government spending by borrowing from the private sector, and to the extent that the latter policy has no reflationary effect because of crowding out, then raising taxes to replace such borrowing would not be deflationary.
On the other hand, to the extent that crowding out is non-existent, then the above “borrow and spend” IS reflationary, and consequently abandoning this policy WOULD be deflationary. But that is not a big problem: this deflationary effect can be countered to any extent that is desired by printing money to pay for some or all of the above government spending.
Of course such money printing is popularly classified as “deficit”, thus it could be argued that replacing borrowing with money printing does not reduce “the deficit”. However borrowing and money printing are as different from each other as chalk is from cheese.
The former involves increasing debt to China. The latter involves giving U.S. citizens more of the tokens they want to engage in economic activity. Which do you want? (The tokens are called "dollars", by the way.)
The $20 bills in your wallet correspond to past government “deficits”. Is this a problem? Should everyone in the U.S. burn their entire stock of 10,20 and 100 dollar bills?
Ralph,
There is no "crowding out." The drain in reserves that results from selling Treasuries is matched, dollar for dollar, by reserves added by the Fed. This has to be, otherwise the Fed funds rate would rise above the Fed's target.
Until the Fed started paying interest on reserves there was a normal bias toward accomodation because banks would not hold excess reserves as they didn't earn interest. The Fed, therefore, had to provide reserves or risk disrupting the payments system or losing control of its overnight lending rate.
Now that the Fed pays interest on rerserves, the reserves stay in the system. On balance the level of reserves exceeds the drain associated with the sale of securities, so it's correct to say that the funds to buy Treasuries comes from the gov't itself and does not constitute borrowing per se.
In order for the gov't to run a surplus it must take in more in taxes than it spends and to reduce the public debt it redeems more Treasury securities than it sells, resulting in a decline in the amount of Treasuries held by the public. Since Treasuries constitute part of the assets held by the non-governmental sector, wealth is reduced (Assets-liabilities=net worth, where assets are declining). The non-governmetal sector (the public) becomes poorer by definition.
Insofar as China is concerned, the dollar reserves accumulated as a result of exports to the U.S. are held in Treasuries because Treasuries are functionally savings accounts of the U.S. government. The way way we "pay back China" (an illogical statement, really, because they have not "lent" us anything) is to redeem the Treasuries while simultaneously crediting their reserve account at the Fed. Quite simple.
Hope that helps.
what ?
I understand Mike as saying that taking down the deficit is accomplished by taking away people's money back into the government.
Retraction of money from the real economy leads to recession and that Could mean not enough money chasing not enough goods which is neither inflationary nor deflationary.
Goog,
Exactly. Taking down the deficit means the gov't is taking away people's money. Well said.
Medicare and social security outlays guarantee we will have respectable deficits for years to come. Congress & Obama aren't going to touch those programs with a ten foot pole -- so these promises on the wee bit of discretionary spending shouldn't cause too much alarm.
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