A bad deficit is one where despite fiscal policy there remains significant unemployment and weak economic growth. Bad deficits are typically a result of poor policy choices such as tax cuts for top income earners, an over-reliance on automatic stabilizers such has unemployment insurance, long and costly wars, or even in the rare circumstance bail out of corporations (ie. Wall Street).
A good deficit is when fiscal policy achieves high employment and strong economic growth. This means investment in public infrastructure and education and yes even tax cuts to middle income families. We know what works - it was done before but our policy makers in DC chose to ignore history and embrace a dangerously flawed economic philosophy that means deficit hawk hysteria and more pain for the rest of us.Rebel Capitalist
Bad Deficit vs. Good Deficits
Jun 01, 2010 | Mr. Blue
20 comments:
"The first thing that the Government has to understand, which it currently does not – if all its “tough budget talk” is a reflection of their state of cogniscance – is that the size of the deficit is a totally useless thing to become obsessed with. The size of the deficit – which is just an accounting statement after all – is not a viable or legitimate policy target." - Bill Mitchell
http://alittleecon.wordpress.com/2013/05/07/are-budget-deficits-or-surpluses-good-or-bad/
Here is where Bill uses "good" v. "bad deficits. See bold below:
If the budget deficit is not sufficient, then national income will fall and full employment will be lost.
If the government tries to expand the budget deficit beyond the full employment limit (G – T)(Yf) then nominal spending will outstrip the capacity of the economy to respond by increasing real output and while income will rise it will be all due to price effects (that is, inflation would occur).
In this sense, Modern Monetary Theory (MMT) specifies a strict discipline on fiscal policy. It is not a free-for-all. If the goal is full employment and price stability then the Full-employment budget deficit condition has to be met.
Are budget deficits or surpluses good or bad?
The budget balance has no meaning as a standalone aggregate. What does a $A30 billion federal deficit mean? Nothing in itself. What does a deficit of 2 per cent of GDP mean? Only that the deficit is 2 per cent of current price GDP. Is a deficit that is 2 per cent of GDP better or worse than one that is 4 per cent of GDP? The answer it that it all depends.
The higher deficit figure might be the exemplar of fiscally responsible policy choices whereas the lower outcome might indicate fiscally irresponsible decisions. Or, the opposite might be the case, depending on the circumstances....
In this context, one of the most important elements of public purpose that the state has to maximise is employment. Once the private sector has made its spending (and saving decisions) based on its expectations of the future, the government has to render those private decisions consistent with the objective of full employment.
So then the national government has a choice – maintain full employment by ensuring there is no spending gap which means that the necessary deficit is defined by this political goal. It will be whatever is required to close the spending gap. However, it is also possible that the political goals may be to maintain some slack in the economy (persistent unemployment and underemployment) which means that the government deficit will be somewhat smaller and perhaps even, for a time, a budget surplus will be possible.
But the second option would introduce fiscal drag (deflationary forces) into the economy which will ultimately cause firms to reduce production and income and drive the budget outcome towards increasing deficits.
Ultimately, the spending gap is closed by the automatic stabilisers because falling national income ensures that that the leakages (saving, taxation and imports) equal the injections (investment, government spending and exports) so that the sectoral balances hold (being accounting constructs).
But at that point, the economy will support lower employment levels and rising unemployment. The budget will also be in deficit – but in this situation, the deficits will be what I call “bad” deficits. Deficits driven by a declining economy and rising unemployment.
So fiscal sustainability requires that the government fills the spending gap with “good” deficits at levels of economic activity consistent with full employment.
Fiscal sustainability cannot be defined independently of full employment. Once the link between full employment and the conduct of fiscal policy is abandoned, we are effectively admitting that we do not want government to take responsibility of full employment (and the equity advantages that accompany that end). [emphasis added]
Bill Mitchell, MMT Budgetary principles
This is another one of those semantic arguments where both sides are talking past each other.
I think the "good" vs "bad" deficit argument is a silly one.
Bill Mitchell has made the statement many times but a quick Google search didn't bring up the phrase. Anyway, what Bill says is not "gospel", I just happen to agree with him.
There are no "good"deficits...it means that policy has led to a bad outcome.
It means we have starved the system for funds. How can that be good in any scenario?
All deficits are "bad" in this context.
A perennial deficit resulting from a structural trade imbalance is also a "bad" deficit.
It comes down to ones definition of "bad" or "good", which is pretty much different for everyone.
Paul,
From your first comment here it proves Bill "gets it" so to speak.. ie Bill is a GOOD MAN (as we all are for the most part from what I can discern..)
But it is HARD to not get SUCKED IN to the semantics of the academe, especially if we are in it...
Question becomes: Is it better to maintain a pattern of sound words at the risk of sounding out of the mainstream?
iow what often happens is we try to communicate in their paradigm... Is this the best approach? I dont profess to know for sure...
Talking about "good" or "bad" deficits I agree to a great extent misses the real point... again as Bill asserts in your first comment here...
I'm at a point where I want to write the song: "I'm so bored with the SBE..."
But is this jumping the gun for the 99.999999% of the population that still doesnt "get the math"? When do WE "move forward"?
these are open questions still at this point imo...
rsp,
The reading on a thermometer when we take someone's temperature isn't "good" or "bad"...it's just an indicator...
If one has a fever it can be "good"... It means your body is fighting a cold or the flu...
But it's also "bad"...it means you may be sick.
Deficits are neither "good" nor "bad". They are a message...don't shoot the messenger (or call him names).
Matt, wrt the sectoral balances I agree...it's just a starting point that tells us something about the flow of savings...it says little about spending.
My definitions of deficits.....
Good deficits come from big across the board tax cuts which stimulate demand because it puts more money into people's pockets. However, it also stimulates supply because incentives are raised to work, save and invest because the after tax return on capital has gone up. Good deficits also come from government spending on infrastructure that is needed which produces an asset and a return on investment but which the private sector is unable or unwilling to invest in. Latest bridge collapse in Washington State is a good example.
Bad deficits come from government spending on politician's pet projects otherwise known as "pork" or "malinvestment" which produces little or no return on investment. Government spending on the military over and above what is needed to defend this country is one big example. Foreign aid is mostly a subsidy to the military industrial complex and/or agri-business. The latest IRS scandal provides ample evidence that the $13 billion budget for the IRS and the $168 billion cost of compliance with the byzantine tax code is money poorly spend. Worse, it is tyranny.
And then as Mosler points out, there are the truly ugly deficits which are the result of recessions that cause tax revenue to collapse.
"Good deficits come from big across the board tax cuts which stimulate demand"
Tax cuts stimulate saving or wealth accumulation mainly unless cuts are focused on regressive taxes. Even then much if the money is saved.
Demand is stimulated mostly by spending and the bulk of that is public spending...currently running at about $4T/year..private debt (household) doesn't come close...it has been a sizable add-to in recent years.
because it puts more money into people's pockets. TRR
No! It (taxation) doesn't. Instead, it doesn't take money out of people's pockets. Big difference.
And meanwhile, the repayment of bank debt DESTROYS deposits so that DOES take take money out of people's pockets.
So what is needed is something that truly puts money into people's pockets - and that could be as simple as just sending equal amounts of new fiat (created without borrowing) to all citizens. Of course that offends elites but justice is not optional. And nearly the entire population, including non-debtors, deserves restitution for the damage the banking cartel has done to them.
Make that "(reducing taxation)", please.
"No! It (taxation) doesn't. Instead, it doesn't take money out of people's pockets. Big difference."
That's fine. No argument with me.
"So what is needed is something that truly puts money into people's pockets - and that could be as simple as just sending equal amounts of new fiat (created without borrowing) to all citizens."
Sounds pretty silly to me. Why would anyone work?
"meanwhile, the repayment of bank debt DESTROYS deposits so that DOES take take money out of people's pockets." - F.Beard
Not only does it take money out of peoples pockets as principal payments…it transfers money out of the 99.9% pockets to the top 0.1% in the form of interest payments.
Those payments effectively reduce the debtor's net income.
Debt reduces the borrowers future income before he can spend it, degrading the demand created through public spending.
"Tax cuts stimulate saving or wealth accumulation mainly unless cuts are focused on regressive taxes. Even then much if the money is saved."
If everyone got a big tax cut, and most people decided they wanted to save most of it, what's the problem? Maybe that would be an example of the wisdom of the markets at work.
"Sounds pretty silly to me. Why would anyone work?"
Because most people like to work?
Maybe he means by hiring them to do stuff…
However, if unemployed then of course send them the money. It helps the rest of us.
Anyone that works just so they can have money is likely not very good at their job…why would anyone want to hire them anyway? Hence the reason why many small business owners complain that they can't find good help.
When I was a general contractor I had no trouble finding good help…but then I paid them better than most. I found that hiring low-wage help slowed the job down…more time was wasted trying to show them how to do stuff and keep them busy than they were saving. Let the carpenters clean up after themselves, it's more efficient for a small operation.
Just keep those types from starving…at the same time keeping them out of our way so we can do what we do. everybody wins.
That said, I think people that work with a purpose are happier, and I highly reccomend it.
"If everyone got a big tax cut, and most people decided they wanted to save most of it, what's the problem? Maybe that would be an example of the wisdom of the markets at work."
Maybe so but it doesn't help the economy per se…it doesn't put people to work, and public spending is what drives the economy. Some public spending ALSO provides for private sector savings and profits…that's part of the deficit.
Two separate things going on.
If people can't work they can't save.
Cutting taxes is a passive policy for managing an economy.
You just asked why people would work if we just gave them money…now it seems you are advocating for just giving people money. This is how it sounds…
Rich people have to be given more money to encourage them to work…poor people have to be given less money to encourage them to work.
Except the rich people won't work any harder…they just accumulate wealth.
A bit of a class distinction here.
"You just asked why people would work if we just gave them money…now it seems you are advocating for just giving people money. This is how it sounds…"
People who are working should be able to keep more of their hard earned money. How is that advocating for just giving people money?
"Rich people have to be given more money to encourage them to work…poor people have to be given less money to encourage them to work."
I didn't say that. I favor a 10% flat tax on all sources of income. Tax earned income at 10% and eliminate virtually all itemized deductions. Provide a generous standard deduction such that a family of 4 earning $50K per year will be exempt from paying the income tax. Tax dividends, interest income, capital gains, corporate income, estate tax and social security payroll tax all at 10%. In the case of the SS payroll tax 5% would be paid by the employee and 5% would be paid by the employer, and eliminate the income ceiling that applies to the SS payroll tax. On the surface it sounds like a flat tax, but in fact it is quite progressive. It would be so simple that a 12 year old could calculate the tax on a 3X5 index card. We could get rid of the IRS and rehire all the IRS bureaucrats in the private sector which would be BOOMING.
"Except the rich people won't work any harder…they just accumulate wealth."
Rich people may put more investment capital at risk (working smarter?) if the after tax return on capital goes up due to a cut in the capital gains tax. And, if they make a good investment, you are correct.... they will accumulate more wealth.
"Because most people like to work?"
Right. That's why they can't wait until the weekend and then go out and buy lottery tickets. My guess is that most people probably hate their jobs, but they get up early in the morning and go out to work because they have bills to pay and family responsibilities to meet.
I think what you mean is that everyone whether they are conscious of it or not has a desire to make a positive contribution to society. That is what keeps us from becoming alienated from each other. Of course there is also a criminal class that simply prefers to steal from others rather than create something of value.
And, there are other classes of work as well that don't produce wealth per se, but are nevertheless necessary for keeping track of it like accountants, or servicing it like law enforcement and municipal services. A lot of these people do like to work and truly do love their jobs, but I reckon a lot more would rather be doing something else.
It's not natural to work for money. This is Marx's fundamental point. A person who has to work to get money to survive has to give up his or her freedom to do so. People that are not free are not happy because they are alienated from their nature, which is to be free.
Everyone wishes to express freedom creatively, which different for all people, although there are categories and levels. The ideal is reached by aligning all people with their category and level, with the ability to be flexible across categories and to rise in level with increasing competence.
Labor markets in a market economy and market state are supposed to be able to do this most efficiently and effectively through the money wage. This has not worked out as advertised, however, for a lot reasons most of which involve many frictions that are not taken into account in the theory.
The result is exploitation, one one hand, and alienation on the other, with the obvious social, political and economic effects.
Well said Tom.
"Rich people may put more investment capital at risk (working smarter?)"
Right…money supplied to them by public spending…if public spending didn't stock the pond with dollars there would be little reason to invest. The sharecropper economy.
Entrepreneurs don't deserve a special place in society…it takes all kinds to make an economy.
Those investors would be helpless without a workforce. Everyone has his place.
"Right. That's why they can't wait until the weekend and then go out and buy lottery tickets."
That's quite a cynical outlook you have today.
"I think what you mean is that everyone whether they are conscious of it or not has a desire to make a positive contribution to society."
That's one way of looking at it…
I like to stay busy doing what I enjoy doing…
What I enjoy doing is also a source of income, which has been a plus…I feel sorry for anyone that has to work at a job they don't like doing.
Saying people subconsciously have a desire to contribute to society has a moral component to it, and I personally don't buy into moral arguments.
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