• Please keep all posts on the Rittenhouse verdict here: Rittenhouse Verdict. Note the moderator warnings in the thread. The thread will be heavily moderated with a zero tolerance policy for any baiting, flaming, trolling or other rule breaks. Stick to the topic and not the other posters. Thank you.
  • This is a political forum that is non-biased/non-partisan and treats every person's position on topics equally. This debate forum is not aligned to any political party. In today's politics, many ideas are split between and even within all the political parties. Often we find ourselves agreeing on one platform but some topics break our mold. We are here to discuss them in a civil political debate. If this is your first visit to our political forums, be sure to check out the RULES. Registering for debate politics is necessary before posting. Register today to participate - it's free!

A Thought Experiment On Budget Surpluses

David_N

DP Veteran
Joined
Sep 26, 2015
Messages
6,562
Reaction score
2,769
Location
The United States
Gender
Male
Political Leaning
Liberal
A piece on Forbes by Steve Keen. Read it, and try to put aside the idea that the government is a household.
Forbes Welcome
While conservative parties—like the USA’s Republicans, the UK’s Tories, and Australia’s Liberals,—are more emphatic on this point than their political rivals, there’s little doubt that all major political parties share the belief that the government should aim to have low government debt, to at least balance its budget, and at best to run a surplus.
Let’s consider this via a little thought experiment. The numbers are far-fetched, but they’re chosen just to highlight the issue:

Imagine an economy with an GDP of $100 per year, where the money supply is just $1—so that $100 of output each year is generated by that $1 changing hands 100 times in a year. And imagine that this country’s government has accumulated debt of $100—giving it a debt to GDP ratio of 100%—and it decides to reduce it by running a surplus that year of 1% of GDP. And imagine that it succeeds in its target.

What will this country’s GDP the following year, and what will happen to the government’s debt to GDP ratio?

The GDP will be zero, and the government’s debt to GDP ratio will be infinite.

Huh? The outcomes of this policy are the opposite of its intentions: a policy aimed at reducing the government’s debt to GDP ratio increased it dramatically; and what is perceived as “good economic management” actually destroys the economy. What went wrong?

As I noted, the numbers are far-fetched, but the principle is correct: a government surplus effectively destroys money. A government surplus, though it might be undertaken with the noble aim of reducing government debt, and the noble intention of helping the economy to grow, will, without countervailing forces from elsewhere in the economy, increase the government’s debt to GDP ratio, and make the economy smaller (if the rate of turnover of money—it’s so-called “velocity of circulation”—is greater than one).

This little thought experiment illustrates the logical flaw in the conventional belief that running a government surplus is “good economic management”: it ignores the relationship between government spending and the money supply. Unless the public finds some other way to compensate for the effect of a government surplus on the money supply, the surplus will reduce GDP by more than it reduces government debt.
And the public does find other ways.. but it's not sustainable.

Steve touches on this:
But surely my thought experiment can’t be right, can it, because haven’t there been cases where governments have run surpluses and the economy has boomed? Yes there have been, because in the real world, the public can counter the destruction of money by a government surplus in two ways: they can borrow money from the banks, or they can run a trade surplus with the rest of the world (I’ll focus just on a domestic economy for this post and discuss the impact of the trade balance in another post).

Just as a government surplus destroys money, lending by banks creates it (if new loans exceed the repayment of old loans by the public).

There's another longer thought experiment, but I've cut it due to thread length. Here is the conclusion:
So how realistic is this thought experiment? It’s far from the sort of complete dynamic model that I prefer building, but the basic points it makes do apply in the real economy:

Far from “saving money”, Government surpluses actually destroy it;
Absent a trade surplus, the only way to counter this is by the private sector borrowing as much as or more money into existence than the government destroys by its surplus;
So an economy can grow if the government runs a surplus, but only at the expense of a rising private sector debt to GDP ratio; and
As common-sense implies and history confirms, this can’t and won’t keep growing forever. At some point—for most countries, at between 150% and 250% of GDP—it stops growing. Then private sector deleveraging compounds the effect of a government surplus, by also destroying money; finally,

Velocity has had a secular tendency to fall since the 1980s, when private sector debt (in America) reached the significant level of 95% of GDP—see Figure 1. There’s every reason to think that this declining velocity has been in response to rising private sector indebtedness.
Most economists, unfortunately, tend to ignore private sector debt.
 

James972

Banned
DP Veteran
Joined
Jan 26, 2016
Messages
22,166
Reaction score
808
Gender
Undisclosed
Political Leaning
Undisclosed
A piece on Forbes by Steve Keen. Read it, and try to put aside the idea that the government is a household.
Forbes Welcome


And the public does find other ways.. but it's not sustainable.

Steve touches on this:


There's another longer thought experiment, but I've cut it due to thread length. Here is the conclusion:

Most economists, unfortunately, tend to ignore private sector debt.

A surplus and no debt is a wonderful thing. It probably means the govt is smaller and wasting less of the tax payers money thus interfering less with economic growth. The golden rule is: we got from the stone age to here thanks to the supply of new inventions. Govt does not invent anything so can't help the economy grow. Do you understand.
 
Top Bottom