John T. Harvey — Dear President Trump: Your Tax Plan Needs Bigger Deficits!

What I want to highlight here is this: the private sector needs government deficit spending if it is going to recover properly from both the heart attack of the Financial Crisis and the decades of disease brought on by income redistribution and rising debt levels. This is so because government deficits are private-sector surpluses.

The logic is really very simple. What number do you get when you add up every trade surplus and trade deficit on the planet? Zero, of course, because one nation’s trade surplus is another’s trade deficit. This is a specific application of the general rule that in any closed system, the sum of all deficits and surpluses must be zero. If you and I are the only two people in the economy and I spend more than I earn, then you earn than you spend (and by the exact same amount, of course). There aren’t many inescapable truths in life, but this is one.

Now think about the U.S. government budget deficit. If Washington is spending more than it earns, then non-Washington must be earning more than it spends. In 2016, for example, the US federal government spent $585 billion more than it collected in taxes.

That money did not disappear in a puff of smoke. It became the excess of income over spending earned by non-Washington. Non-Washington had a $585 billion surplus or, which is the same thing, $585 billion of savings.

This is an inescapable accounting truth and it implies that any tax plan that hopes to stimulate the private sector must create a budget deficit. Federal government budget surpluses drain non-Washington income. That’s hardly what we need. Pundits and policy makers need to stop worrying about Washington’s deficit and start focusing on non-Washington’s surplus.

“Wait,” you may ask, “true or not, doesn’t this just lay the foundation for bigger problems in the future?” Almost certainly not. Let me address a few of the most common worries:

Forbes — Pragmatic Economics
Dear President Trump: Your Tax Plan Needs Bigger Deficits!
John T. Harvey | Professor of Economics, Texas Christian University