So why do federal deficits and debt exist in the first place?

[bomberfox]

There is one overarching reason, and you touched on it.

If we consider that we want GDP to increase every year, we just need to look at what is happening with all of those GDP components, which is where I was hoping this thread would go. If you take away the G component, what happens to GDP normally? Or in response to a shock?

I find GDP to be a rather finnicky measure for the economic wellbeing of the people. I mean its useful because capitalist economies must grow and grow but can we truly expect infinite growth on a finite planet? If healthcare gets more and more expensive that contributes to GDP growth. If workers are in debt up to their eyeballs that grows GDP but i think we need to ask sans capitalism going into recession are we doomed to ever growing misery of keeping this line up?

 

[bomberfox]

Cite an instance of hyperinflation that was due to too much government spending in their own currency, and not because of a precipitous drop in production (real or de facto), or holding too much foreign-denominated debt.

Even according to the axioms of mmt you can overspend into hyperinflation. To pretend you cant is one of the things i find most dishonest. We live on a finite planet you can certainly go too far.

 

[Visbek]

But why can't all of that government spending just come from taxation?

Because there's too much spending, and not enough taxation.

Is the private sector unable to fully provision for itself AND its government for some reason?

75% of federal spending today is:
• Social Security
• Medicare
• Medicaid
• Defense
• Interest on the debt

The private sector does not, and cannot, provide these services.

 

[JohnfrmClevelan]

Because there's too much spending, and not enough taxation.


75% of federal spending today is:
• Social Security
• Medicare
• Medicaid
• Defense
• Interest on the debt

The private sector does not, and cannot, provide these services.

We manage to produce enough stuff. We have a (giant) army. Everything we need, as a country, gets done. All the real resources are there, and more - there is no question about that part. And if you consider the government to be just a big consumer (which they are), then the economy provides for all of these things, even what the government purchases, even the government employees, the army, etc., is all just American labor doing a job.

If you imagine a balanced budget (which I'm not advocating for), taxes should be able to pay for everything the government spends. GDP = G + I + (X-M); the national income (GDP) is enough to consume all of our production and cover investment. Taxes in a balanced budget world just replace the consumption and investment that taxpayers lost. GDP growth, assuming we grow, comes from increased bank loans, as at least a portion of our growth normally does. It's theoretically possible, but it doesn't happen over any long span (we still grew the economy under Clinton's balanced budgets, but private sector debt really increased).

The reason it doesn't work is because people don't spend 100% of their income. Savings is a demand leakage and requires increased PS debt and/or federal deficit spending to fill the gap, or GDP shrinks. And a trade deficit is just saving by foreign parties. Savings from income is the whole reason we run deficits and have amassed a national debt.

 

[JohnfrmClevelan]

I find GDP to be a rather finnicky measure for the economic wellbeing of the people. I mean its useful because capitalist economies must grow and grow but can we truly expect infinite growth on a finite planet? If healthcare gets more and more expensive that contributes to GDP growth. If workers are in debt up to their eyeballs that grows GDP but i think we need to ask sans capitalism going into recession are we doomed to ever growing misery of keeping this line up?

GDP growth doesn't necessarily have to entail burning more resources, even with population growth. People working from home, for instance, get their work done without having to drive to and from the office. Renewable energies, etc. So much of our spending is just on entertainment. I'd bet that per capita energy use is going down.

 

[JohnfrmClevelan]

Even according to the axioms of mmt you can overspend into hyperinflation. To pretend you cant is one of the things i find most dishonest. We live on a finite planet you can certainly go too far.

You can overspend into inflation. Hyperinflation takes a huge disparity between demand and supply, the kind you only see due to a big drop in production.

 

[gman]

Stop getting the U.S. involved in unnecessary wars and lying about it being for national security. That would a good start and I think Trump is absolutely right on this issue.

 

[MTAtech]

Actually could be pretty soon if Trump doesn't stop his bullshit...

You are right but it's not just Trump. It's the regressive GOP Congress.

What we are seeing is an enormous tax cut bill that would spike the deficit by—depending on the version we're seeing—three-ish to five-ish trillion dollars partially offset by huge cuts to Medicaid and huge cuts to food assistance and some other things. So the net package will be a huge deficit increase while taking away people's health care and people's food.

anyone who thinks that Trump and the GOP are being populist should have in mind that this is sort of the most aggressively un-populist, anti-populist legislation. How big are we talking about? They are shooting for $1.5 to $2 trillion of spending cuts. We haven't seen the Medicaid proposal yet. I think no matter what they're doing, it will be the largest Medicaid cut in history. And the only question is, by how much? Are we talking $500 billion of Medicaid cuts, 600, 700, 800? They gave the Energy and Commerce committee an $880 billion instruction.

On food stamps, they're looking at cutting it in quarter. Basically, there was a Biden-era reassessment of the thrifty food plan that kind of Reworked it already. Anyway, that doesn't matter. They want to undo that. Right now the average benefit is a little bit more than $2 per person per meal. So already it's very meager. They want to take it down to a buck sixty-seven per person per meal. Really pinching pennies from hungry families.

The public doesn't realize how radical this plan is.

 

[OrphanSlug]

For reference, GDP = G + C + I + (X-M). G is govt. spending, including deficit spending, C is consumption, I in investment, and (X-M) is net exports.

So why do we run deficits, anyway? Discuss.

Lots of reasons really.

But if we paid more attention to econ 101 level principles the G part of the equation represents the only entity in the GDP equation that has influential control over its own currency.

Meaning fiscal policy that influences taxation and spending is a barometer to lessen the amplification of the normal economic cycle. Which is another way to say become a means to deal with economic faults via fiscal and trade policy, occasionally going to the Fed for help with monetary policy.

No other entity involved in any part of the GDP math has that capability.

Because we can argue, very well, that we rarely do not run a deficit the question really should be what is the valuation, condition, and demand for the US Dollar. Assuming the US Dollar is holding its own, competing well, then the presence of a deficit is in itself not represent a problem.

 

[Jetboogieman]

You are right but it's not just Trump. It's the regressive GOP Congress.

What we are seeing is an enormous tax cut bill that would spike the deficit by—depending on the version we're seeing—three-ish to five-ish trillion dollars partially offset by huge cuts to Medicaid and huge cuts to food assistance and some other things. So the net package will be a huge deficit increase while taking away people's health care and people's food.

anyone who thinks that Trump and the GOP are being populist should have in mind that this is sort of the most aggressively un-populist, anti-populist legislation. How big are we talking about? They are shooting for $1.5 to $2 trillion of spending cuts. We haven't seen the Medicaid proposal yet. I think no matter what they're doing, it will be the largest Medicaid cut in history. And the only question is, by how much? Are we talking $500 billion of Medicaid cuts, 600, 700, 800? They gave the Energy and Commerce committee an $880 billion instruction.

On food stamps, they're looking at cutting it in quarter. Basically, there was a Biden-era reassessment of the thrifty food plan that kind of Reworked it already. Anyway, that doesn't matter. They want to undo that. Right now the average benefit is a little bit more than $2 per person per meal. So already it's very meager. They want to take it down to a buck sixty-seven per person per meal. Really pinching pennies from hungry families.

The public doesn't realize how radical this plan is.

If they do this.

Combined with everything else.

They will run into the wall Liz Truss ran into.

The international bond market.

Only they won't care and then America will be well and truly ****ed.

 

[OrphanSlug]

Lots of reasons

Emergency spending, economic investment, changes in tax policy, “social spending” exceeding anticipated numbers (healthcare, education, pensions, general welfare), needing to stimulate an economy, economic conditions changing, etc.

There’s no singular answer or reason

Yes and no, the underlying reason is influence on the status of the economy. In some regard all of those items boil down to some positive or negative influence on GDP. The yes part is lots of reasons to spend more or less, tax more or less, alter trade, alter monetary policy, etc.

For the government spending part of the GDP math not every dollar spent has the same economic impact, similar story with every dollar taxed.

Ultimately we can look at the conditions of the economy and the condition of the US Dollar, and as we've done for most years going back decades now run a deficit.

 

[bomberfox]

You can overspend into inflation. Hyperinflation takes a huge disparity between demand and supply, the kind you only see due to a big drop in production.

Ok. That makes more sense.

 

[bomberfox]

GDP growth doesn't necessarily have to entail burning more resources, even with population growth. People working from home, for instance, get their work done without having to drive to and from the office. Renewable energies, etc. So much of our spending is just on entertainment. I'd bet that per capita energy use is going down.

Right. I just think it needs to be combined with a lot of other measurements because its well rather vague by design.

 

[bomberfox]

You are right but it's not just Trump. It's the regressive GOP Congress.

What we are seeing is an enormous tax cut bill that would spike the deficit by—depending on the version we're seeing—three-ish to five-ish trillion dollars partially offset by huge cuts to Medicaid and huge cuts to food assistance and some other things. So the net package will be a huge deficit increase while taking away people's health care and people's food.

anyone who thinks that Trump and the GOP are being populist should have in mind that this is sort of the most aggressively un-populist, anti-populist legislation. How big are we talking about? They are shooting for $1.5 to $2 trillion of spending cuts. We haven't seen the Medicaid proposal yet. I think no matter what they're doing, it will be the largest Medicaid cut in history. And the only question is, by how much? Are we talking $500 billion of Medicaid cuts, 600, 700, 800? They gave the Energy and Commerce committee an $880 billion instruction.

On food stamps, they're looking at cutting it in quarter. Basically, there was a Biden-era reassessment of the thrifty food plan that kind of Reworked it already. Anyway, that doesn't matter. They want to undo that. Right now the average benefit is a little bit more than $2 per person per meal. So already it's very meager. They want to take it down to a buck sixty-seven per person per meal. Really pinching pennies from hungry families.

The public doesn't realize how radical this plan is.

He even upped military spending, transferring tons of wealth from our public coffers to wealthy defense contractors. I had a feeling he would do this.

Its robbing the poor and elderly to pay rich defense contractors and the police.

 

[Gatsby]

So why do we run deficits, anyway? Discuss.

When unemployment is high, a modest deficit can be beneficial for economic stimulus.

But outside of that circumstance, mainly because spending money and keeping taxes low are both politically popular. Paying for our spending is less popular.

 

[JohnfrmClevelan]

When unemployment is high, a modest deficit can be beneficial for economic stimulus.

Even when the economy is really cooking (relatively speaking), deficit spending may be necessary to keep GDP growing. It all depends on whether or not demand leakages (saving from income) would otherwise outweigh demand injections (increased private sector credit and federal deficit spending). We run deficits almost all of the time - high growth, low growth, negative growth - and that contribution to GDP is almost always necessary to keep GDP above water.

But outside of that circumstance, mainly because spending money and keeping taxes low are both politically popular. Paying for our spending is less popular.

The government really doesn't pay for deficit spending with any real resources. They just create and spend money (or bonds) into the economy.

 

[JohnfrmClevelan]

Right. I just think it needs to be combined with a lot of other measurements because its well rather vague by design.

Yeah, GDP should take distribution into consideration. You can have a healthy-looking GDP while also having significant poverty.

 

[OrphanSlug]

When unemployment is high, a modest deficit can be beneficial for economic stimulus.

That is not entirely true, and structurally speaking it is the duel-aim of monetary policy to deal with maximum employment and stable prices.

"Modest" deficits is actually becoming more rare the further we go, and in modern times is impacted more by tax cuts benefitting the few the most over increased spending (by year on year number and percentage of GDP on a trend line.) The whole concept of "economic stimulus" largely ends up a political spin machine statement.

But it is still a function of government spending, and what is far more important is structured stimulus for longer term outlooks. Dealing with infrastructure, science, technology improvements, etc. tends to give the biggest returns over time. Something that deals with economic growth paths which is the biggest foundational piece to increased jobs.

It is a bit old school but largely still applies. Government spending and taxation to stabilize the economy during normal economic cycles, often involving deficit spending during recessions to soften the blow of finding the trough and slowing down deficits during expansion to the next peak. It is that politically this rarely happens as economics would suggest it should.

But outside of that circumstance, mainly because spending money and keeping taxes low are both politically popular. Paying for our spending is less popular.

Sort of true, sort of not. Politically it is fair to say treasury promises wins votes. Less contribution to in taxes, more spending from, or some terrible combination of the two.

Our real issue is economics does not subject itself to popularity contests in a manner consistent with political sentiment, and technically "paying for our spending" is speaking to those without understanding economics. More money into the economy is generally how this is handled which puts far more emphasis on the demand for and stability of the US Dollar (because it competes) on a trend line over looking to just the deficit number fiscal year to year.

Besides, also in modern times how our government threatens the debt we issue and/or deals with trade via temper tantrum tariff fights is a bigger influence over the value of the US Dollar. That does not mean our credit rating is not subject to scrutiny over our levels of debt, because it clearly does. But what rattles the markets and the economy more is this back and forth in political fiscal policy wants that tends to stress both the economy and our currency. (I.e. the Fed is always being reactionary with monetary policy since there is such disconnect with political fiscal and trade policy that causes the harm.)

As long as the US Dollar moderately holds its own, and we do not run into serious resource constraints, we might just weather this latest outlook we see. Ultimately GDP growth should be our target, and all policy should be in concert to pull that off while watching where we are in the natural economic cycle.

 

[Tensor101]

I think that pretty much every thread in this "Government Spending and Debt" section misses the mark in a fundamental way. Governments with their own currency do not go into true, household-type debt when they issue bonds. It is simply another way that governments exercise their power to create and spend their own currency.

When our government deficit spends, it does so by issuing bonds. The private sector buys those bonds, and the government promptly spends the proceeds right back into the economy; the net result is an increase in bonds held by the PS as rock-solid assets, an increase in aggregate demand, and no change in the number of dollars. (The Fed adjusts the number of reserves/dollars up or down in a separate operation, as they see fit.) The government essentially buys what it wants by issuing bonds, and those bonds never need to be extinguished (just maintained, by issuing more bonds). i.e., the government is self-funding, and does not borrow in order to spend. Understanding this changes the whole cost/benefit analysis of government spending.

For reference, GDP = G + C + I + (X-M). G is govt. spending, including deficit spending, C is consumption, I in investment, and (X-M) is net exports.

So why do we run deficits, anyway? Discuss.

Just a minute, when the government issues bonds to cover spending, those bonds create an obligation the government must pay. Those obligations are the deficit.

 

[Tensor101]

Just a minute, when the government issues bonds to cover spending, those bonds create an obligation the government must pay. Those obligations are the deficit. It's borrowed money that simply must be paid back. What's so theoretical? The main problem is the way the government tries ot deal with the deficit, Corporate Tax Breaks does not work becasue the corporations use the windfall to buy back their own stock. This does not help the Economy one single little bit. It simply makes the executives richer since they own a lot of thier company's stock and if it just goes up by 5%, it translates to millions of dollars in each executive's bank account.

 

[JohnfrmClevelan]

Just a minute, when the government issues bonds to cover spending, those bonds create an obligation the government must pay. Those obligations are the deficit.

The obligation is interest payments, but it's still not real debt. Bond issuance, and the resulting interest payments, is not operationally necessary; it's a political choice to issue bonds at all. We could easily just print up currency and spend it instead.

The take-home lesson is that the government doesn't borrow their own dollars, they just create bonds and buy what they need with them. Dollars shift around from saver to earner within the private sector, but the government isn't taking anything out of the PS (taken as a whole) in order to spend.

 

[Tensor101]

Ok, sure, but you still wind up with the same debt to pay back. The bonds streamline the process. Just printing the money that the government wants to spend results in a excess of dollars driving the currency downward thereby. Buying power of average citizens goes down with it.

 

[OrphanSlug]

Ok, sure, but you still wind up with the same debt to pay back. The bonds streamline the process. Just printing the money that the government wants to spend results in a excess of dollars driving the currency downward thereby. Buying power of average citizens goes down with it.

The reason you see spending power decrease over a period of time is nominal income did not rise at a rate consistent with inflation. Basically, the same amount of dollars year to year buying things that are more expensive. Two math points.

We have real reasons why the target is 2%, that tends to be the mathematical sweet spot between economic growth and price stability for the common basket of goods and services. What you never want is absent inflation as that is too prone to deflation. The only plausible way for fiscal policy, trade policy, and monetary policy to handle economic fault, deal with over amplification of the natural economic cycle, is have an expanding economy. A few bumps in the road notwithstanding.

It is when we are too low or way too high over that 2% goal we need to be talking about economic impact, and as we should we revisit income growth per income quintile to determine where the faults may be.

More often than not, excess at the top with everyone else experiencing wage rate increases below inflation is the overwhelming reason we see economic faults. It is not because of deficits and debts necessarily, nor the reality of how a government that influences its own currency deals with debt (interest payments and maturity.)

It is why most modern economic modeling and principles observe the reality that in fiat money systems the government does not tax in order to spend, if anything we tax in order to deal with excess and throttle economic peaks (better economic participation by each income quintile and less risk.) As you point out, the entity with the debt has influence over the currency involved, so now you look at things like the US Dollar's competition against the international basket of currencies, supply and demand for the currency, debt to total asset holding by the government, and sentiment in holding US debt internationally to know what is healthy and not.

Our overwhelming problem is fiscal and trade policy ends up politically motivated devoid of economic reasoning, therefor monetary policy has to play defense to political goals. Buying power by the "average citizen" is a consequence of political goals. Not inflation alone.

 

[Tensor101]

Our overwhelming problem is fiscal and trade policy ends up politically motivated devoid of economic reasoning, therefor monetary policy has to play defense to political goals. Buying power by the "average citizen" is a consequence of political goals. Not inflation alone.

I can agree with that statement. Trump could have met with these countries with the threat of tariffs being held out to them. But he wants the tariffs to increase the funds in the Treasury for his corporate tax break, of which he will be one of the recipients. It's disgusting greed.

 

[JohnfrmClevelan]

Ok, sure, but you still wind up with the same debt to pay back. The bonds streamline the process. Just printing the money that the government wants to spend results in a excess of dollars driving the currency downward thereby. Buying power of average citizens goes down with it.

Sovereign debt does not need to be repaid. And deficit spending, which is the reason for the debt buildup, doesn't result in an increase in the number of dollars, just an increase in the number of bonds. Deficit spending gives you the boost in aggregate demand, but it doesn't add dollars to the economy. I wouldn't be so quick to tie deficit spending to inflation.