Explaining Why Federal Deficits Are Needed[W:5330]

I encourage everyone to look at this with an open mind.
Explaining Why Federal Deficits Are Needed - New Economic PerspectivesNew Economic Perspectives

Most MMT advocates probably took months to get comfortable with it. But like a personal computer, one need not understand its innards to use its power. The great power of MMT is its lesson that the federal government can create new dollars by running deficits to do things that should be done.

Most Americans believe the federal government is like a family or business that must live within its income. On the surface, that makes sense and the reasons why it is wrong are complex. Here are five nuggets, or simple ways to explain why it is wrong to voters who will never be economists. They show why federal deficits are necessary. They can be adapted and used as appropriate.

Federal deficits are necessary and the government normally runs them. It ran them during 129 of the past 200 years or nearly two thirds of the time. During the other third, it ran surpluses to reduce its debt during five periods of six or more years. Each period led to a major depression.

1823-1836: Federal debt reduced 99% – depression began 1837.
1852-1857: ” ” ” 59% – ” ” 1857.
1867-1873: ” ” ” 27% – ” ” 1873.
1880-1893: ” ” ” 57% – ” ” 1893.
1920-1930: ” ” ” 36% – ” ” 1929.

The government had to run deficits to recover from each depression.

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I'd like to add on this doesn't include the recent clinton surplus.
How Bill Clinton's Balanced Budget Destroyed The Economy - Business Insider

The private sector cannot survive in negative territory. It cannot go on, year after year, spending more than its income. It is not like the US government. It cannot support rising indebtedness in perpetuity. It is not a currency issuer. Eventually, something will give. And when it does, the private sector will retrench, the economy will contract, and the government's budget will move back into deficit."

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When the government collects taxes it takes dollars out of the economy. It also appears to take dollars from the economy when it sells bonds. But unlike taxpayers who lose their purchasing power, bond buyers get bonds and keep their purchasing power. The deficit spending adds new dollars to the economy as if they had been “printed”. Note these key points:

Unlike reluctant taxpayers, bond buyers want the bonds to use as savings accounts to safeguard their dollars and earn interest.
The government redeems the bonds when they come due, but it can roll over or sell replacements indefinitely.
The total of all dollars the federal government has created this way since 1790 is called the federal debt which never has to be repaid while the nation exists. Attempts to reduce the debt significantly never worked because they took dollars from the economy that it needs to operate and grow.
Because the government can create dollars, it can never run out of them and cannot be forced into bankruptcy.
The federal government is not like families or companies because only it creates new dollars that stay in the economy unless it removes them by running surpluses.
This explanation is generally correct, but the details of how the government creates new dollars are more complicated.

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I look forward to some interesting discussion.

Cont:
Despite the budget surplus, interest rates were higher. And the surplus provided no protection of the coming slump. And if anything, it just weakened the most brittle part of the economy: households.

Furthermore, there is a pattern of this.

Japan ran a budget surplus in the year right before its economy went into terminal decline...

So while Clinton will be remembered nostalgically tonight, for both the performance of the economy and his government finances, they shouldn't be remembered fondly.

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There is absolutely no reason for the united states to "balance the budget."

The Clinton surpluses were a good thing precisely because of the fact that the Private sector was overspending.... And what happens when you lose control of the debt (like Japan has, and many many countries are close to doing) and you end up at 1000% debt to GDP? You think an economy can keep going like that?

Ellis_G said:

The Clinton surpluses were a good thing precisely because of the fact that the Private sector was overspending.... And what happens when you lose control of the debt (like Japan has, and many many countries are close to doing) and you end up at 1000% debt to GDP? You think an economy can keep going like that?

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The Clinton surpluses were followed by a recession. The private sector wasn't overspending; people were playing the stock market, especially dot.com stocks. Those surpluses happened because people were paying taxes on their stock gains; then, the dot-com stocks tanked, because there was no business behind them that could justify their price.

JohnfrmClevelan said:

The Clinton surpluses were followed by a recession. The private sector wasn't overspending; people were playing the stock market, especially dot.com stocks. Those surpluses happened because people were paying taxes on their stock gains; then, the dot-com stocks tanked, because there was no business behind them that could justify their price.

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That doesn't mean that his surpluses were a bad idea.

Ellis_G said:

That doesn't mean that his surpluses were a bad idea.

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Well, there aren't many circumstances in which it's a good idea for the government to remove more dollars from the economy than it spends in. Certainly not in the U.S., where we run trade deficits that almost every other country takes advantage of. If you go back to the supply-side thread, we started talking about demand leakages and injections, and our trade deficit is a large, consistent leak. We were still running large trade deficits while the government was running a surplus - all of those dollars, on both ends, came out of private sector pockets. A similar thing happened in the 2000's, when homeowners were borrowing heavily against their home equity. Recessions followed both times.

David_N said:

I encourage everyone to look at this with an open mind.
Explaining Why Federal Deficits Are Needed - New Economic PerspectivesNew Economic Perspectives

I'd like to add on this doesn't include the recent clinton surplus.
How Bill Clinton's Balanced Budget Destroyed The Economy - Business Insider



I look forward to some interesting discussion.

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The debt rose every year under Clinton and we've been running deficits every year since 2008 and the Nations economy is still on life support 8 years later. ....with some exception.

Here in Texas we've seen a unprecedented influx of Americans move into our Cities and the surrounding areas and a unprecedented influx of private sector investment to go along with it

The State of Texas and the cities that have seen their populations grow exponentially didn't have to go into debt to fund this growth. We just had to adhere to the very supply side strategies MMTers say dont work

People respond to incentives. Its a axiomatic truth that blows the minds of your average MMTers.

Also the existence of Texas's multibillion dollar rainy day fund hasn't had any negative impact whatsoever.

Make no mistake, MMT is just a very poorly veiled attempt to sell off destructive Progressive economic initiatives as something new. Its not even a clever attempt.

Its monetary gibberish used to perpetuate Fiscal initaives that grow the debt and Govt at the expense of the economy and the Federal budget

So. Should Japan start spending ? Should Venezuela start spending ?

Should the State of California start spending ? Should Detroit start spending ? Cities can sell bonds to deficit spend BTW

Oh that's sweet. You want others to have an open mind while you do not. Typical liberal hypocrisy.

Moderate Right said:

Oh that's sweet. You want others to have an open mind while you do not. Typical liberal hypocrisy.

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Yes, keep an open mind, but if you disagree with us you're a idiot, dont understand accounting, the economy, how Banks work, etc, etc.....

Fenton said:

The debt rose every year under Clinton and we've been running deficits every year since 2008 and the Nations economy is still on life support 8 years later. ....with some exception.

Here in Texas we've seen a unprecedented influx of Americans move into our Cities and the surrounding areas and a unprecedented influx of private sector investment to go along with it

The State of Texas and the cities that have seen their populations grow exponentially didn't have to go into debt to fund this growth. We just had to adhere to the very supply side strategies MMTers say dont work

People respond to incentives. Its a axiomatic truth that blows the minds of your average MMTers.

Also the existence of Texas's multibillion dollar rainy day fund hasn't had any negative impact whatsoever.

Make no mistake, MMT is just a very poorly veiled attempt to sell off destructive Progressive economic initiatives as something new. Its not even a clever attempt.

Its monetary gibberish used to perpetuate Fiscal initaives that grow the debt and Govt at the expense of the economy and the Federal budget

So. Should Japan start spending ? Should Venezuela start spending ?

Should the State of California start spending ? Should Detroit start spending ? Cities can sell bonds to deficit spend BTW

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Uh...we've been running deficits since before 2008.

JohnfrmClevelan said:

Well, there aren't many circumstances in which it's a good idea for the government to remove more dollars from the economy than it spends in. Certainly not in the U.S., where we run trade deficits that almost every other country takes advantage of. If you go back to the supply-side thread, we started talking about demand leakages and injections, and our trade deficit is a large, consistent leak. We were still running large trade deficits while the government was running a surplus - all of those dollars, on both ends, came out of private sector pockets. A similar thing happened in the 2000's, when homeowners were borrowing heavily against their home equity. Recessions followed both times.

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John, why do you continue to make the argument that the economy must have a private sector surplus? I seen you post a chart that attempts to establish a relationship between recession and a private deficit, do you have access to the source and it's data?

rocket88 said:

Uh...we've been running deficits since before 2008.

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Sure, and we've had eeconomic booms and recessions.

Besides, Im not the one trying to make the correlation that surpluses damage the economy.

Fenton said:

Yes, keep an open mind, but if you disagree with us you're a idiot, dont understand accounting, the economy, how Banks work, etc, etc.....

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They still believe in money trees, Santa Clause, and the Easter Bunny.

Kushinator said:

John, why do you continue to make the argument that the economy must have a private sector surplus? I seen you post a chart that attempts to establish a relationship between recession and a private deficit, do you have access to the source and it's data?

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I don't have the data, and I'm lousy at FRED. The source is Stephanie Kelton.

I think JOhn and David are pretty open minded. The issue I typically see is when people don't actually argue against their points, but they argue against points they aren't making. Ie (unlimited spending, Weimar type inflation, bigger government etc...). And other mythical things like the Lost Decade or a prolonged Depression from government spending, etc....

I got someone in the other thread to type out that Japan grew at a rate 1% less than the US in the 90's (during a tech boom). And yet they still wouldn't own up to the fact that Japan never had a Lost Decade, even after admitting that it nearly matched the US in growth during a boom period!

JP Hochbaum said:

I think JOhn and David are pretty open minded. The issue I typically see is when people don't actually argue against their points, but they argue against points they aren't making. Ie (unlimited spending, Weimar type inflation, bigger government etc...). And other mythical things like the Lost Decade or a prolonged Depression from government spending, etc....

I got someone in the other thread to type out that Japan grew at a rate 1% less than the US in the 90's (during a tech boom). And yet they still wouldn't own up to the fact that Japan never had a Lost Decade, even after admitting that it nearly matched the US in growth during a boom period!

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I find the graph that you posted that showed Japanes GDP tracking the USs pretty interesting actually.

Also, GDP out of context is a pretty poor way to evaluate the success and health of a economy.

Fenton said:

I find the graph that you posted that showed Japanes GDP tracking the USs pretty interesting actually.

Also, GDP out of context is a pretty poor way to evaluate the success and health of a economy.

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I don't disagree. But I was just using what others were using to make a point.

JP Hochbaum said:

I think JOhn and David are pretty open minded. The issue I typically see is when people don't actually argue against their points, but they argue against points they aren't making. Ie (unlimited spending, Weimar type inflation, bigger government etc...). And other mythical things like the Lost Decade or a prolonged Depression from government spending, etc....

I got someone in the other thread to type out that Japan grew at a rate 1% less than the US in the 90's (during a tech boom). And yet they still wouldn't own up to the fact that Japan never had a Lost Decade, even after admitting that it nearly matched the US in growth during a boom period!

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Being almost 50% off of the US's growth isn't nearly matching it is it now? Also it's not like Japan didn't benefit from the tech boom (hell, in some ways they helped drive the expansion of tech), and it's a lost decade precisely because they've fallen well behind most other wester countries in a lot of factors, they were once the most productive nation on earth, but now they only manage 62% of what the US manages, the lowest out of all the 'big' economies (UK, USA, Japan, France, Germany, etc.). And they're well below where they should have been, how is it not a lost decade?

Also the reason that per capita growth isn't used ( or at least I don't use them for this reason) is because they're a pain in the arse in comparing different countries as I've yet to find a source where GDP per capita is shown as a percentage growth, rather than just raw numbers.

comparing 100+ years ago to today is like comparing a bicycle to a Ferrari.

The bond issue is misleading. interest rates on bonds are so pathetically low interest isn't really a factor. safeguarding is a more likely reason.
But to the point why this is misleading. your thread title mentions deficits... but you have misdirected and are talking about debt. not the same thing at all. although there is a relationship of course but selling bonds is not deficit spending.

As to the bankruptcy.. in a sense yes.. however you will recall when QE was going full bore and overspending was at its highest, companies like Moody's and Standard&Poor etc lowered the credit rating of USA.
This affects interest rates of course. it also affects confidence and it affects currency exchange rates. Pretending we can just create money when needed and nothing will really happen is so foolishly naïve and shortsighted.
The US has been forceful with telling Japan and China not to devalue their currency but then some think its ok for us to do it.

Debt we will always have. deficits we should rarely have is pretty much my point.

JP Hochbaum said:

I think JOhn and David are pretty open minded. The issue I typically see is when people don't actually argue against their points, but they argue against points they aren't making. Ie (unlimited spending, Weimar type inflation, bigger government etc...). And other mythical things like the Lost Decade or a prolonged Depression from government spending, etc....

I got someone in the other thread to type out that Japan grew at a rate 1% less than the US in the 90's (during a tech boom). And yet they still wouldn't own up to the fact that Japan never had a Lost Decade, even after admitting that it nearly matched the US in growth during a boom period!

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Open minded? In what way is anyone able to change their minds, ever? I have yet to see it. They are as closed minded as you can get. Their lights were turned off long ago. Their only agendas are to convince others that they are right about everything.

JP Hochbaum said:

I think JOhn and David are pretty open minded. The issue I typically see is when people don't actually argue against their points, but they argue against points they aren't making. Ie (unlimited spending, Weimar type inflation, bigger government etc...). And other mythical things like the Lost Decade or a prolonged Depression from government spending, etc....

I got someone in the other thread to type out that Japan grew at a rate 1% less than the US in the 90's (during a tech boom). And yet they still wouldn't own up to the fact that Japan never had a Lost Decade, even after admitting that it nearly matched the US in growth during a boom period!

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Take away concerns about unlimited spending and Weimar type inflation and David is not saying anything of importance, IMO. Most of us understand that small deficits can be helpful sometimes. Most of us understand that too quickly reducing spending can hurt. I don't think that small deficits are what MMT people are considering.

I'm not an economist, but I'm starting to understand aspects of global trade alot better and how such impacts our national debt and deficit.

I think the simplest way to explain it is like this:

Our deficit would really be a problem IF America really didn't produce anything domestically that wasn't in high demand abroad AND we didn't have a surplus of same. Let's take apples, for example. Everyone loves apples. Let's say we grow more apples that can be consumed domestically. What do we do with the surplus? We sell them, of course, to foreign buyers. Here's where things get alittle tricky because the deficit comes into play here.

Some time ago, someone asked me "What is America's #1 commodity? What exactly do we trade the most? The answer: The U.S. Dollar! It's why there's so much emphasis on keeping it strong AND ensuring that the dollar remains the world's #1 reserve currency.

So, we trade (sell) U.S. securities (U.S. Treasury Notes/Bonds) to foreign investors (countries), pay the interest on those securities and foreign governments purchase U.S. goods and materials, some of which are used in foreign manufacturing. This list of not only the top 10 U.S. Exports along with a breakdown of what items are purchased from the U.S. by various countries around the world should make this global trade alittle bite more clear. Notice how machinery equipment, cars, medical equipment, aircrafts and spacecrafts, and electronics are on every list for foreign trade.

Now, that's not to say that the deficit couldn't come back and bite us in the butt. The deficit does matter, but only in the context as to whether or not we can't sell U.S. made products abroad OR we borrow more than we can repay over time. But, using the deficit as a political football is rather foolish. While fair to debate the merits of a trade imbalance, it's foolish to use the deficit as a wedge issue without first understanding whether or not we really do have a glut of U.S. surplus goods we can't get rid of either by domestic consumption or by exporting abroad.

Eric7216 said:

Take away concerns about unlimited spending and Weimar type inflation and David is not saying anything of importance, IMO. Most of us understand that small deficits can be helpful sometimes. Most of us understand that too quickly reducing spending can hurt. I don't think that small deficits are what MMT people are considering.

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The size of the deficit is determined by the size of demand leakages. Federal deficits are there to fill the demand gap.

after the CRAZINESS of this OP, Reagan deserves an apology.