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Think big deficits cause recessions? Think again!

JP Hochbaum

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"From the origins to World War II

In its first 150 years, the government periodically undertook systematic multi-year reductions in the national debt by taking in more revenues than it spent.

Each of six such sustained periods led to one of the six major depressions in our history. The last three of these crashes were the truly significant depressions of the industrial era.

This is the record:

1. 1817-21: In five years, the national debt was reduced by 29 percent, to $90 million. A depression began in 1819.

2. 1823-36: In 14 years, the debt was reduced by 99.7 percent, to $38,000. A depression began in 1837.

3. 1852-57: In six years, the debt was reduced by 59 percent, to $28.7 million. A depression began in 1857..

4. 1867-73: In seven years, the debt was reduced by 27 percent, to $2.2 billion. A depression began in 1873.

5. 1880-93: In 14 years, the debt was reduced by 57 percent, to $1 billion. A depression began in 1893.

6. 1920-30: In 11 years, the debt was reduced by 36 percent, to $16.2 billion. A depression began in 1929.

There have been no such multiyear budget surpluses and debt reductions since World War II and, significantly, no major new depression. The record suggests that reducing the debt never sustained prosperity, even when the debt was virtually wiped out by 1836. The highest deficits were those of world War II, ranging from 20 to 31 percent of Gross National Product. For a few years following the war, the debt was greater than GNP, the only such case in history. The wartime borrowing and spending actually ended the Great Depression.

Post-World War II

Both political parties pledge to balance the budget by 2002, and all budget-balancers hope ultimately to reduce the national debt. In the meantime, the nine recessions of the depression-free postwar decades have each followed reductions in the annual deficits relative to GDP.

Using data developed by Warren B. Mosler, economic analyst for a Florida investment firm, I suggest how some of the recent recessions have been politically significant:

· Deficit reductions, 1971-74, led to the recession that began at the end of 1973; a slow recovery did not help Gerald Ford in 1976.

· Deficit reductions, 1977-80, gave way to a recession in 1980 that damaged Jimmy Carter’s re-election hopes.

· Deficit reductions, 1987-89, were followed by the 1990-91 recession that harmed George Bush.

Meanwhile, the longest period without a recession was from November, 1982 to July, 1990.

The Republicans who now praise that "Reagan boom" never refer to the deficits or blame the Democratic Congress, while Democrats repeatedly attack "Reagan deficits." Neither side seems aware that a steep rise in deficits began in 1981, preceding the "boom" by almost two years.

When deficit reductions finally began in 1987, they paved the way for the next recession. Political irony is everywhere.

When the economy slides downhill, the incumbent president is badly damaged, and it does him little good to proclaim "success" in reducing deficits.

Ronald Reagan suffered no political harm because of the deficits of the 1980s and, even at his advanced age, might have been elected again in 1988 if he had been permitted to run. Whatever citizens say to pollsters, they vote against recessions, not budget deficits.

Driven by what appears to be wholly fallacious economic principles, politicians have put together such monstrosities as the Gramm-Rudman-Hollins deficit-reduction policy and the more recent "zero-sum budgeting" (all new programs must be financed by cuts in existing programs), along with the Clinton administration’s "reinvention of government" ("downsizing") to virtually guarantee a new economic disaster, perhaps more serious than any in recent decades."

Think big deficits cause recessions
If this would just be one instance, you could call it circumstance. If it was a few instances you can use the correlations doesn't imply causation fallacy. But when it happens over a dozen times, it starts to become empirical, and incredibly strong evidence. Which side of history will you take? The sidde of science and observation? OR the side of religious fervor where logic and reason is thrown out the window for ideology?
 

David_N

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But I thought deficit reduction made America great again? :mrgreen:
 

Crovax

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If this would just be one instance, you could call it circumstance. If it was a few instances you can use the correlations doesn't imply causation fallacy. But when it happens over a dozen times, it starts to become empirical, and incredibly strong evidence. Which side of history will you take? The sidde of science and observation? OR the side of religious fervor where logic and reason is thrown out the window for ideology?

What about the simplistic side where you link one factor to a major complex system? If you are really interested in recessions and deficits maybe you should study the monetary policy that was in place in those times. And that recessions arent inherently bad, if they help prevent a larger recession/depression and curb inflation.
 

David_N

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What about the simplistic side where you link one factor to a major complex system? If you are really interested in recessions and deficits maybe you should study the monetary policy that was in place in those times. And that recessions arent inherently bad, if they help prevent a larger recession/depression and curb inflation.

Except the connection is clear. A reduction in the deficit/debt reduces the private sectors ability to save and drains dollars from the private sector. This increases private sector debt accumulation.
 

Crovax

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Except the connection is clear. A reduction in the deficit/debt reduces the private sectors ability to save and drains dollars from the private sector. This increases private sector debt accumulation.

No it reduces their willingness to save and that is usually because smaller deficits mean a better economy.
 

joG

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"From the origins to World War II

In its first 150 years, the government periodically undertook systematic multi-year reductions in the national debt by taking in more revenues than it spent.

Each of six such sustained periods led to one of the six major depressions in our history. The last three of these crashes were the truly significant depressions of the industrial era.

This is the record:

1. 1817-21: In five years, the national debt was reduced by 29 percent, to $90 million. A depression began in 1819.

2. 1823-36: In 14 years, the debt was reduced by 99.7 percent, to $38,000. A depression began in 1837.

3. 1852-57: In six years, the debt was reduced by 59 percent, to $28.7 million. A depression began in 1857..

4. 1867-73: In seven years, the debt was reduced by 27 percent, to $2.2 billion. A depression began in 1873.

5. 1880-93: In 14 years, the debt was reduced by 57 percent, to $1 billion. A depression began in 1893.

6. 1920-30: In 11 years, the debt was reduced by 36 percent, to $16.2 billion. A depression began in 1929.

There have been no such multiyear budget surpluses and debt reductions since World War II and, significantly, no major new depression. The record suggests that reducing the debt never sustained prosperity, even when the debt was virtually wiped out by 1836. The highest deficits were those of world War II, ranging from 20 to 31 percent of Gross National Product. For a few years following the war, the debt was greater than GNP, the only such case in history. The wartime borrowing and spending actually ended the Great Depression.

Post-World War II

Both political parties pledge to balance the budget by 2002, and all budget-balancers hope ultimately to reduce the national debt. In the meantime, the nine recessions of the depression-free postwar decades have each followed reductions in the annual deficits relative to GDP.

Using data developed by Warren B. Mosler, economic analyst for a Florida investment firm, I suggest how some of the recent recessions have been politically significant:

· Deficit reductions, 1971-74, led to the recession that began at the end of 1973; a slow recovery did not help Gerald Ford in 1976.

· Deficit reductions, 1977-80, gave way to a recession in 1980 that damaged Jimmy Carter’s re-election hopes.

· Deficit reductions, 1987-89, were followed by the 1990-91 recession that harmed George Bush.

Meanwhile, the longest period without a recession was from November, 1982 to July, 1990.

The Republicans who now praise that "Reagan boom" never refer to the deficits or blame the Democratic Congress, while Democrats repeatedly attack "Reagan deficits." Neither side seems aware that a steep rise in deficits began in 1981, preceding the "boom" by almost two years.

When deficit reductions finally began in 1987, they paved the way for the next recession. Political irony is everywhere.

When the economy slides downhill, the incumbent president is badly damaged, and it does him little good to proclaim "success" in reducing deficits.

Ronald Reagan suffered no political harm because of the deficits of the 1980s and, even at his advanced age, might have been elected again in 1988 if he had been permitted to run. Whatever citizens say to pollsters, they vote against recessions, not budget deficits.

Driven by what appears to be wholly fallacious economic principles, politicians have put together such monstrosities as the Gramm-Rudman-Hollins deficit-reduction policy and the more recent "zero-sum budgeting" (all new programs must be financed by cuts in existing programs), along with the Clinton administration’s "reinvention of government" ("downsizing") to virtually guarantee a new economic disaster, perhaps more serious than any in recent decades."

Think big deficits cause recessions
If this would just be one instance, you could call it circumstance. If it was a few instances you can use the correlations doesn't imply causation fallacy. But when it happens over a dozen times, it starts to become empirical, and incredibly strong evidence. Which side of history will you take? The sidde of science and observation? OR the side of religious fervor where logic and reason is thrown out the window for ideology?

Economic activities will not always work the same way. In a booming economy fiscal spending or monetary largess will tend to create bubbles, while the can prevent depression, when the country is in recession. Even then, it is important to take note of the causes of the circumstances in the economy, as they will determine the probability of expected impacts occurring.
 

joG

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But I thought deficit reduction made America great again? :mrgreen:

Itwould go a long way to laying the basis for greater freedom of action.
 

David_N

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No it reduces their willingness to save and that is usually because smaller deficits mean a better economy.

Nonsense, a reduction in deficit spending is quite literally less dollars flowing into the private sector. Smaller deficits mean a better economy? Sure, if we're at maximum output.
 

Captain Adverse

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Ridiculous.

It was WWII that ended the Depression. Not because of increased debt, but because of a combination of increased industrial output necessary to fight the war and the practical elimination of unemployment with men serving in the military allowing women to make up the difference working in factories.

We weren't debt free when we had the collapses in 2007 - 2009. Nor were we debt-free when the market crashed during the Great Depression after WWI.

Wars seem to be the go-to response government uses to keep us out of recessions, one of the reasons we seem to be at perpetual war over the last 15 years.
 
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countryboy

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Yes! Fiscal irresponsibility boosts the economy! Who knew? :roll:
 

Crovax

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Nonsense, a reduction in deficit spending is quite literally less dollars flowing into the private sector.

Not necessarily and it also means that each dollar in the private sector is worth less. And you are ignoring the sports car fallacy. If minor deficit spending is good that doesnt mean that major deficit spending is better.
 

David_N

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Ridiculous.

It was WWII that ended the Depression. Not because of increased debt, but because of a combination of increased industrial output necessary to fight the war and the practical elimination of unemployment with men serving in the military allowing women to make up the difference working in factories.

We weren't debt free when we had the collapses in 2007 -2009. Nor were we debt-free when the market crashed during the Great Depression after WWI.
Huh? You mean massive government spending ended the depression? World war 2 led to a massive increase in debt by the way. The financial crisis was just that, something in the financial sector that spilled over. The Great Depression? Lmao, look at point #6
 

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Not necessarily and it also means that each dollar in the private sector is worth less. And you are ignoring the sports car fallacy. If minor deficit spending is good that doesnt mean that major deficit spending is better.

It does? Really? Prices costing more doesn't mean much when people are able to work less for more compared to the 1930's... I am not ignoring any fallacy, it all depends on the present conditions. Is there underemployed labor? Unused resources that can be used to benefit the future? A need to educate kids?
 

DA60

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What about the simplistic side where you link one factor to a major complex system? If you are really interested in recessions and deficits maybe you should study the monetary policy that was in place in those times. And that recessions arent inherently bad, if they help prevent a larger recession/depression and curb inflation.

It amazes me how many people (including economists) do not understand this.

Recessions are a necessary evil...like dieting when you get too fat.

Someone who does not understand that simply does not fully understand macroeconomics.
 

Captain Adverse

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Huh? You mean massive government spending ended the depression? World war 2 led to a massive increase in debt by the way. The financial crisis was just that, something in the financial sector that spilled over. The Great Depression? Lmao, look at point #6

Yeah, LOOK at number 6. "The debt was reduced by 36% to 16.2 billion." That's debt free? What was 16.2 billion dollars in 1929 compared to todays dollars???

War decreases unemployment. Massive government spending on public works is also the typical go-to answer to unemployment. But massive government spending increases debt which increases taxation which drains money from the common herd and syphons it into the pockets of the very wealthy. Debt only helps banks and the wealthy, not the economy.
 

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To be fair with everyone, this is where politics collides with economics.

It makes both macro economic sense and basic mathematical sense that when there is an artificial and political motivation in reducing deficits the likely conclusion is a reduction in GDP, and if that happens to extend outward across 2 consecutive quarters then we have a recession at best and a likely depression forming at worst.

In pure mathematical terms we are talking about a reduction in government spending (G) without any real expectation on what happens to consumer spending (C) and investment (I.) Worse, in economic terms if there is some underline fault with employment levels, and/or aggregate demand, and/or trade deficits then this will be exacerbated by just reducing government spending because of political motivations to do so.

Like it or not, we have a mixed system of economics where we have to deal with the relationship of government spending via economic policy, to monetary policy controls, to our overall economic condition at the time (as in where we are in the economic cycle.) Also like it or not, that economic system is dependent upon all the math that goes into GDP... including government spending.

It is possible to have deficits be healthy or unhealthy, it means as a relation to GDP. Similar story with Total Debt to GDP.

Now, not a bit of this is an excuse to government spend without economic reason. But the flip side is also true where it is impractical to reduce spending without economic reason. We have to pay attention to the condition of our economy (and all of those factors that tell us health.) It is no longer as simple as saying "we have a spending problem" but absent all economic context.
 
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SHOOTER

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It does? Really? Prices costing more doesn't mean much when people are able to work less for more compared to the 1930's... I am not ignoring any fallacy, it all depends on the present conditions. Is there underemployed labor? Unused resources that can be used to benefit the future? A need to educate kids?

"it all depends on the present conditions" that is a cop out ,that statement takes your whole argument down the rabbit hole,sure it does and present conditions are changing at a faster pace,to equate the 20 century with the 21st is not even close.
The impact of the Internet on financial markets is multifaceted
and profound.
run don run
 

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Yeah, LOOK at number 6. "The debt was reduced by 36% to 16.2 billion." That's debt free? What was 16.2 billion dollars in 1929 compared to todays dollars???

War decreases unemployment. Massive government spending on public works is also the typical go-to answer to unemployment. But massive government spending increases debt which increases taxation which drains money from the common herd and syphons it into the pockets of the very wealthy. Debt only helps banks and the wealthy, not the economy.

I never said the debt was gone. Increases taxation? Only if policy makers choose to do so. Lol, the national debt today represents government bonds.
 

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It amazes me how many people (including economists) do not understand this.

Recessions are a necessary evil...like dieting when you get too fat.

Someone who does not understand that simply does not fully understand macroeconomics.

I agree that recessions are a necessary evil. The point is that there is no connection to deficits/debt causing a recession in the United States. If anything, the evidence shows the opposite.
 

DA60

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Oh jeez..another 'deficits are good, surpluses are bad' thread.

And the supposed proof...that recessions frequently happen after periods of surpluses. Sure they do. They also happen after periods of deficits.

And once again...recessions are necessary. And small/medium ones are usually good for the long term health of an economy.

You cannot have large, unsustained growth forever...just as you cannot eat donuts forever. Eventually you have to diet (have a recession) to purge the waste.


This morbid fear of small/medium recessions by Krugmanites/neo-Keynesians is sad, misplaced and erroroneous.
 

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I agree that recessions are a necessary evil. The point is that there is no connection to deficits/debt causing a recession in the United States. If anything, the evidence shows the opposite.

Dude! Who buys government bonds? U.S. Banks! Foreign nations! Why is it that Communist China is now one of the greatest, if not the greatest, holders of U.S. bonds?

Recessions and depressions are caused by irresponsible speculation, typically by banks and businesses. Blaming government fiscal responsibility? Geez, you are trying to convince us that our debt-ridden government is supposed to be the source of our prosperity rather than business...as if that is a good thing! :roll:
 
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OrphanSlug

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Oh jeez..another 'deficits are good, surpluses are bad' thread.

And the supposed proof...that recessions frequently happen after periods of surpluses. Sure they do. They also happen after periods of deficits.

And once again...recessions are necessary. And small/medium ones are usually good for the long term health of an economy.

You cannot have large, unsustained growth forever...just as you cannot eat donuts forever. Eventually you have to diet (have a recession) to purge the waste.


This morbid fear of small/medium recessions by Krugmanites/neo-Keynesians is sad, misplaced and erroroneous.

Modern economics does not boil down to avoiding recessions, it boils down to lessening the amplitude of the economic cycle for a more reasonable path of economic growth by overall trend. So there is avoidance of economic bubbles, and avoidance of massive economic collapses. There can still be expansion and contraction under even the most strict modern day Keynesian principles of economics.

Now, we do not politically bother to listen to those principles which is why we have a realized bubble and pop economic model anyway. Usually at the hands of political stupidity.
 

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Dude! Who buys government bonds? U.S. Banks! Foreign nations! Why is it that Communist China is now one of the greatest, if not the greatest, holders of U.S. bonds?

Recessions and depressions are caused by irresponsible speculation, typically by banks and businesses. Blaming government fiscal responsibility? Geez, you are telling us that our government is supposed to be the source of our prosperity rather than business...as if that is a good thing. :roll:
I want to touch on several things in this post.
First, we only count government bonds as the "national debt" when liabilities also include reserves/notes/coins, but we never count those in the "national debt." It's all political nonsense at this point. Anyways:
The fed has something known as a the fed funds rate, which is the IR that banks and other depository institutions use to lend to each other. In order to maintain this rate, the fed has to do its best to control the amount of reserves. If there are excess reserves, the rate will fall to zero, and if there are to few, the rate goes to infinity. Foreign nations trade with us, earning dollars in their accounts at the fed. They decide they want to earn a tiny bit of interest. We debit some from their "checking account" and give them bonds, which we can never fail to pay. And foreign nations are using already earned dollars to do this, we're not "borrowing." The government is the source of our prosperity.
 
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DA60

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I agree that recessions are a necessary evil. The point is that there is no connection to deficits/debt causing a recession in the United States. If anything, the evidence shows the opposite.

The OP overall suggestion is much too vague, IMO.

Most deficits/surpluses (historically) are not nearly enough to single-handedly cause a recession. And I do not recall many people claiming a deficit will singlehandedly cause a recession. I, for one, have never even thought it.

Sure if you ran MASSIVE surpluses (I.e. took too much money out of consumers hands) then you could cause a recession. Just as if you throw too much cheap money at an economy then you could cause a recession.



BTW...Canada ran deficits for well over 10 years (in the late 90's-early 2000's) and had no more (or more severe) recessions then America during that time.

The notion that small/medium sized surpluses cause recessions is, IMO, totally erroneous.
 

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The OP overall suggestion is much too vague, IMO.

Most deficits/surpluses (historically) are not nearly enough to single-handedly cause a recession. And I do not recall many people claiming a deficit will singlehandedly cause a recession. I, for one, have never even thought it.

Sure if you ran MASSIVE surpluses (I.e. took too much money out of consumers hands) then you could cause a recession. Just as if you throw too much cheap money at an economy then you could cause a recession.



BTW...Canada ran deficits for well over 10 years (in the late 90's-early 2000's) and had no more (or more severe) recessions then America during that time.

The notion that small/medium sized surpluses cause recessions is, IMO, totally erroneous.
I hear about it all the time.
"The debt is going to kill our kids! We all owe $46,000! If we don't cut this deficit, the private sector will die!"
A surplus can indeed cause a recession, just like a deficit. It all depends on what conditions are like. If we have plenty of unemployed/unused supply, deficit spending is the right thing to do.
 
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