Monday, November 28, 2011

Dean Baker on why deficits don't matter

The country is still celebrating the inability of the supercommittee to cut Social Security and Medicare, but it is important to move on from this victory to retake control of the political debate from the One Percent. As it stands, the One Percent are insisting that the country genuflect over the non-problem of the budget deficit, at a time when tens of millions of workers are unemployed or underemployed, millions of people are facing the loss of their homes and tens of millions of baby boomers are approaching retirement with little other than their Social Security to support them.
The deficit is the agenda of the One Percent. There is no reason that the rest of us should be concerned about budget deficits when the rest of the country is struggling with the economic disaster created by the greed and incompetence of the One Percent.
This is not a statement of morality; it is a statement based on economic reality. Budget deficits can be a problem when an economy is near full employment and the deficit can be pulling resources away from private investment, thereby slowing growth. However, it is not a problem with large numbers of unemployed workers and vast amounts of excess capacity.
This is what the financial markets are telling us every day as interest rates on long-term government bonds hover near 2.0 percent. If deficits were really crimping the economy, we would be seeing interest rates of 6 or 7 percent, or even higher. The deficit hawks do not have an economic case to support their argument, just money and influence. (emphasis added)
Read the whole post at The Huffington Post
Time to Retake Politics From the One Percent in Both Political Parties
by Dean Baker

Baker finishes strong with a free market proposal to reduce US medical costs.
If we can't immediately change the system, then why not take advantage of the gains from trade? If we change rules to make it possible for Medicare beneficiaries to buy into the health care systems in other countries or make it easier for patients to have medical procedures done at far lower cost elsewhere, it should be an enormous win-win, offering gains that could be in the trillions of dollars. And what free-market fundamentalist can argue against the principle of giving people a choice?
In fact, conservatives and self-described free traders run screaming from the idea of opening medical care to trade. They want trade that will lower the wages of auto workers and textile workers by putting them in direct competition with low-paid workers in the developing world; they hate trade when it threatens to reduce the income of the pharmaceutical industry, the insurance industry, and others in the One Percent.


googleheim said...

To try to draw parallels between this article's USA synopsis and the EU situation is like this :

The top 1% in USA are austrians who don't want to devalue their dollars in return for creating industry here again and by the way exporting some stuff.

The top 1% in Europe are analogously figured to be the Germans and the Scandinavians. They don't want to devalue their currency to save the southern europeans by creating exports and attracting tourists with a cheap Euro.

As we see what will happen to these "1%" 'ters in EU may happen here as the fallout goes global.

Tom Hickey said...

Good that Baker gets that deficits don't matter when there is unemployment and an output gap. But bad that it's apparently for the wrong reasons.

Baker doesn't seem to get that deficits never "crimp the economy." Deficits increase government payments and add to non-government net financial assets , thereby stimulating the economy by increasing effective demand. At or near full employment, the economy can become overstimulated as productive investment and output cannot keep up with the effective demand being created. Then inflation results.

Baker seems to assume that increasing the deficit increases the need for government bond issuance, which compete with private investment for a fixed pool of loanable funds, which doesn't applies under a flexible rate non-convertible system.

wh10 said...

Tom, are you sure he doesn't mean that deficit spending at full employment may hire away private resources in to the public sector? I think I have seen Mosler say this.

In any case, very very close to MMT.

beowulf said...

Tom, are you sure he doesn't mean that deficit spending at full employment may hire away private resources in to the public sector?

Yup, spending is the real tax... but only at full employment.

Tom Hickey said...

That may be what he means. He doesn't specify. But deficit expenditure at full employment would likely be mostly driven by military, health care, and indexing, so I don't see hiring away as the issue. I think that "competition for loanable fund" is more likely.

wh10 said...

Out of curiosity, why do you think he would believe in loanable funds under full employment?

Is there any way we can be optimistic and think he means hiring away :)? Though I think I agree with your point about military, hc, indexing, etc

beowulf said...

Remember, full employment economic models assume balanced trade; meanwhile balanced trade models assume full employment.
That Catch-22 is some catch. Since we always run big trade deficits (around $550B this year), unless we run budget deficits at least as large, domestic private savings will drain away until the well runs dry EVEN AT FULL EMPLOYMENT.

On another note, I just realized what would really foul up the CBO budget model.
The CBO anticipates 3 month Treasuries rising from current 0.03% to 5.0% by 2016 and bear in mind, publicly held debt and MZM are roughly the same size ($10T this year). Note also that earlier this year the FDIC starting taxing bank assets to fund deposit insurance fund.
Instead of a fixed rate, what if the FDIC tax were pegged at 3 month Tsy bill? Put premium revenue on-budget (Tsy's on the hook anyway), per CBO/JCT model, it'd be like adding $500B a year in new revenue starting in 2016. But since banks really really don't want to be paying a 5% asset tax, I have a strong suspicion 3 month Tsy rates in 2016 would actually be around, well, 0.03%. Straightforward enough but I have no idea how the CBO (and the Joint Tax Committee) would score that.

Net interest this year is $200B but projected to be $500B+ from 2016 to the end of days, would they go ahead and subtract $300B from 2016 on (hey there's $1.5T in spending cuts this decade) or would they just follow their budget model over the cliff with an extra $500B a year coming in from FDIC premiums ($2.5 in new taxes this decade)? Heck, since CBO handles spending projects and separately, JCT handles tax projections, maybe they'll assume both-- a $4T revenue swing! :o)

Calgacus said...

Beowulf, it's not much of a catch at all. We wouldn't have or sustain full employment unless we offset the trade deficit enough. If not immediately, eventually. For a while credit & consumer spending, perhaps a bubble, could keep things going, but eventually, as you say, private domestic savings will drain away. But then the full employment megadeficit will restore savings. Always take care of full employment at a decent wage & everything else takes care of itself.

If you like roller-coaster rides, then let the bubbles expand & see where it goes. If you don't, then take away the punch bowl early. No biggie either way. Just don't follow current austerity economic wisdom, which amounts to machine-gunning the party guests who lost at musical chairs.

beowulf said...

Its a gigantic catch because there is absolutely no political support for running deficits (much less "megadeficits") at full employment.
During a recession, certainly deficit hawks will oppose deficit spending but at full employment even the deficit doves pile on (with their "budget balanced across the business cycle" nonsense).

In 2007, unemployment was 4.6% (shockingly, lower than the CBO's 5.2% NAIRU event horizon) and the budget deficit was $160B or 1.2% of GDP. How likely would it have been for Congress to endorse increasing the deficit an additional $700B to offset the 6% of GDP trade deficit?
Ultimately, the only politically feasible solution to this dilemma is Warren Buffett's.

Calgacus said...

I was talking in economic terms. Yes, there could be a problem in political terms. But only under a Democratic president as stupid as Obama. The man did not even try.

Under a Republican, the Republican centered deficit terrorism would disappear in ten minutes. Nothing succeeds like success, and once a sensible MMT program was carried out, everybody would be saying they always were MMTers.

Worrying about "politically feasible solutions" instead of learning and communicating the truth and trying to act on it is the least feasible, most foolish politics in the long run.