Lars P. Syll — Why so-called​ deficits​ are economic necessities

Vintage Bill Vickrey quote.

Lars P. Syll’s Blog
Why so-called​ deficits​ are economic necessities
Lars P. Syll | Professor, Malmo University

Bill Mitchell — US growth surprise will not last

Last Friday July 27, 2018), the US Bureau of Economic Analysis published their latest national accounts data – Gross Domestic Product: Second Quarter 2018 (Advance Estimate), which tells us that the annualised real GDP growth rate for the US was a very strong 4.1 per cent in the was 3 per cent in the June-quarter 2018. Note this is not the annual growth over the last four-quarters, which is a more modest 2.8 per cent (up from 2.6 per cent in the previous quarter). As this is only the “Advance estimate” (based on incomplete data) there is every likelihood that the figure will be revised when the “second estimate” is published on August 29, 2018. Indeed, the BEA informed users that it has conducted a comprehensive revision of the National Accounts which includes more accurate data sources and better estimation methodologies. So I had to revise my entire dataset today to reflect the revisions. The US result was driven, in part, by “accelerations in PCE and in exports, a smaller decrease in residential fixed investment, and accelerations in federal government spending and in state and local spending.” Real disposable personal income grew at 2.6 per cent (down from 4.4 per cent in the first-quarter). The personal saving ratio fell from 7.2 per cent to 6.8 per cent. Notwithstanding the strong growth, the problems for the US growth prospects are two-fold: (a) How long can consumption expenditure keep growing with flat wages growth and elevated personal debt levels? (b) What will be the impacts of the current trade policy? rise is a relevant question. At some point, the whole show will come to a stop as it did in 2008 and that will impact negatively on private investment expenditure as well, which has just started to show signs of recovery. Government spending at all levels has also continued to make a positive growth contribution. But with rising private debt levels and flat wages growth the growth risk factors are on the negative side. When that correction comes, the US government will need to increase its discretionary fiscal deficit to stimulate confidence among business firms and get growth back on track....

To the degree that the consolidated domestic private sector is driving growth, growth of private debt is the key driver. Growth based on expanding private debt is income-dependent, and incomes must also grow for the increased debt to be sustainable over time. If the rate of growth of private debt falters, increasing net exports or (inclusive "or)) government deficit spending must offset to maintain the growth path.

Bill looks at the details of this and it is a good example of MMT macro analysis. He shelfs the discussion of the external sector for another day.

I will write more about the tariff tit-for-tat in a future blog post.

What appears to be happening is the decisions taken by Trump are putting US trading partners into situations that will see them concede in one way or another....

This is a fairly long post and quite detailed. It will be mostly of interest to those already handy with MMT analytical tools, but it will also give MMT newbies a look at how MMT analysis works.

Bill concludes by looking at the US labor market and the plight of US workers.

This post really covers the bases!

Here is something else to consider:

So, the standard neoliberal claims that the labour share has to be reduced to stimulate more private business investment and jobs is not supported by the evidence.

The increased owner/rentier share is not going to capital investment and not that much is going to increased consumption either. This is means that the residual is being saved.

The increased savings over investment would imply that owners expect a better return from financial investment than productive investment, as Marx held — and also predicted that when this became chronic it presaged late-stage capitalism. This seems to be occurring in the developed world where the rate of actual growth is masked by the lack of distinction in GDP between actual production and services, especially financial services. Production is increasingly being exported to the still developing world. Now President Trump is trying to reverse that trend.

Bill Mitchell – billy blog
US growth surprise will not last
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also

On net, we can say that the economy is likely getting some near-term boost from the tax cut, which could lead to a growth rate of close to 3.0 percent in 2018. It is difficult to see this persisting into 2019 unless we see a pick up in productivity growth as the labor market tightens and employers are forced to pay higher wages.

It is important to point out that for almost everyone but economist types, growth does not mean anything. People care about whether they have a job and whether their pay is rising. On the last point, the news has not been good, as real wages have been flat over the last year.

However, it is important to note that without the increase in energy prices, they would have risen 0.5–0.7 percent. That is not a great story given how much ground has to be made up for workers to get their share of growth, but at least it is movement in the right direction. And, as the energy price hikes of last summer move out of the 12-month window, we will be looking at real wage gains of 0.5 to 0.7 percent, what workers were seeing before Donald Trump became president.

Beat the Press
Quick Thoughts on Trump's "Amazing" Economy
Dean Baker | Co-director of the Center for Economic and Policy Research in Washington, D.C

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

Joe Weisenthal — The Untold Story Of How Clinton's Budget Destroyed The American Economy

Oldie but goodie, a propos the moment.  With HRC running, we are going to be hearing a lot about the prosperity that the Clinton surplus brought. NOT.

This kind of thinking base on gold standard mentality that is no longer appropriate on that the US is on a floating rate system instead of fixed rate is also a chief reason for the failure of the left, as Bill Mitchell explains today in his post, link to here.

This is not only a must-read but a must-share. Shout it from the rooftops.

In addition to being remembered for a strong economy, Bill Clinton is remembered as the last President to preside over balanced budgets.

Given the salience of the national debt issue in American politics today, the surpluses are a major mark of pride for the former President (and arguably the entire country). They shouldn't be.

"I think it is safe to say that we are still suffering the harmful effects of the Clinton budget surpluses," says Stephanie Kelton, an economics professor at the University of Missouri Kansas City.

To understand why, you first need to understand that the components of GDP looks like this….

Stephanie Kelton is now serving as the chief economist of the Senate Budget Committee for the minority at the behest of Sen. Bernie Sanders (D-VT), the ranking minority member of the Budget Committee.

Business Insider (Sep. 5, 2012)
The Untold Story Of How Clinton's Budget Destroyed The American Economy
Joe Weisenthal

Ramanan — Ben Bernanke Embracing Heterodox Ideas

Comparison of Ben Bernanke 2015 quote and Godley and Lavoie 2007 quote. Bernanke finally wising up?

The Case of Concerted Action
Ben Bernanke Embracing Heterodox Ideas
Ramanan

Robert Skidelsky — Topsy Turvy Economics

Governments, too, must live within their means. So say all of us. But the less a country is producing, the smaller the government's means. So common sense suggests that governments that want to cut their deficits should do all they can to increase their country’s means, which will also increase their own means. The simplest way to do this is to provide people with work. 

But common sense and economics have never had a very close connection. Economists have conned us into believing that all the means available are already being used. If unemployment is a lot higher than it was a few years back, this isn't because people can't find jobs: it is because they prefer leisure to work, and so are not part of the 'means'. So we - governments and all of us - must 'cut our cloth' to suit our reduced means, because the previous means have mysteriously disappeared.

Robert Skidelsky's Website

Topsy Turvy Economics

Robert Skidelsky

Peter Cooper — Balancing the Budget Over the Cycle

It seems to me that those, including New Keynesians, who support the maintenance of a “balanced budget over the cycle” are either not recognizing or rejecting a number of points made by heterodox Keynesian (or Kaleckian) critics of such a policy approach, including proponents of Modern Monetary Theory (MMT) as well as many other Post Keynesian and Sraffian economists....

heteconomist
Balancing the Budget Over the Cycle
Peter Cooper

Bill McBride — Treasury: Budget Deficit declined in July 2014 compared to July 2013

This graph shows the actual (purple) budget deficit each year as a percent of GDP, and an estimate for the next ten years based on estimates from the CBO. 

The deficit should decline further next year and is projected to stay below 3% for the next 5 years. 

The decline in the deficit, as a percent of GDP, from almost 10% to under 3% in 2014 is the fastest decline in the deficit since the demobilization following WWII (not shown on graph).

Then he adds,

As an aside, the states are doing better too…

Doesn't get the difference between currency users and the currency issuer.

Calculated Risk
Treasury: Budget Deficit declined in July 2014 compared to July 2013

Bill McBride

Data, Indexes and GIGO

Here is comment I put up at Asymptosis that stands alone and is worth consideration here.

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Inflation can't be measured precisely since there is no observable price level. The price level is an index and an index is an arbitrary figure that could be arrived at through different paths and rationales.

What is important is the rate of change of a constructed price level, so if the index is figured the same way each period, then a rate of change for that index can be computed and used to measure actual changes in purchasing power in contrast to the apparent rate that volatility of some goods suggests. While the price level constructed is an arbitrary figure, it's action is not as long as measurement of the variables over time is reliably accurate.

However, data collection in the case of economic data is not the result of direct observation as in the natural sciences either. Economics is a social science and the data is much looser. Some important economic data is anecdotal rather than observational.

Inflation is a bogus measure when applied beyond the limits of the data, which is most of the time historically and even today in countries without adequate institutional arrangements for data collection and processing. Inflation rates extending back centuries in historical studies are usually presumed to be true. On what basis?

The US is a leader in the field of economic data, and to suggest that its agencies get the data wrong or misconstruct it (Sumner), or manipulate the data for political purposes (Jack Welch) is to suggest that the data upon which macro analysis is founded is garbage. Ergo, macro analysis is GIGO. The question is, How true is that? It's a question I have been pondering for some time. It seems to me that a lot a macro analysis may be GIGO, such as Reinhart & Rogoff turned out to be on critical analysis.

Then there's Robert Eisner's work on national accounting, which also suggests that data is misconstructed and misinterpreted based on the institutional construction and interpretation of national accounting, e.g, in comparison with firm accounting. As a result the reported fiscal balance may not represent the actual fiscal stance, and so politicians are misguided in relying on it to formulate economic policy.

Is there a pernicious tendency to take reported figures for constructs like price index and fiscal balance as exact when they are only estimates or best guesses? Enquiring minds would like to know.

Same goes for medical studies for medications and procedures, as anyone who has had the occasion to question one's physician on specific recommendation and knows what questions to ask comes to realize. Are consumers generally too trusting of physicians recommendations? My conclusion from experience is yes.

There's a lot of flying by the seat of the pants that gets swept under the rug of conscious awareness in the presumption of a degree of exactitude that is non-existent.

Steve Roth — It’s a Spending Problem, Right?

Economist’s View: Per Capita Government Spending by President

Read it at Asymptosis
It’s a Spending Problem, Right?

by Steve Roth