david walker okays deficits???!!!

>   
>   (email exchange)
>   
>   On Thu, Feb 25, 2010 at 12:54 PM, Roger wrote:
>   
>   am I reading this right?
>   
>   he seems to be admitting the difference between “structural” and nominal deficits, but
>   is still fixated on debt/GDP ratios, not to mention national “revenue”
>   
>   nevertheless, some progress is better than none, and ANY sign of movement is a
>   step in the right direction
>   

Agreed!

Looks like a serious chink in the armor of what used to be deficit terrorist #1???!!!

Address jobs now and deficits later

By LAWRENCE MISHEL & DAVID M. WALKER

Feb. 24 (Politico) — President Barack Obama is in a difficult position when it comes to deficits. Today’s high deficits will have to go even higher to help address unemployment. At the same time, many Americans are increasingly concerned about escalating deficits and debt. What’s a president to do?

The answer, from a policy perspective, is not that hard: A focus on jobs now is consistent with addressing our deficit problems ahead.

The difficulty is that many politicians and news organizations often cast deficit debates as a dichotomy: You either care about them or you don’t.

But this is rarely accurate. The fact that the two of us, who have philosophical differences on the proper role of government, find much to agree on about deficits is a testament to the importance of dropping this useless dichotomy and finally talking about deficits in a reasonable way.

As in every economic downturn, federal revenues have fallen steeply because individuals and corporations earn less in a recession. High unemployment also results in higher expenditures for safety net programs, like Medicaid, unemployment benefits and food stamps.

Not surprisingly then, a huge recession can yield a huge deficit. Efforts to put people back to work and help restore the economy, like the recovery package passed last February, can also increase short-term deficits.

Though a concern, most of the recent short-term rise in the deficit is understandable. Furthermore, public spending can help compensate for the fall in private spending, and help stem the pain of substantial job losses.

With more than a fifth of the work force expected to be unemployed or underemployed in 2010, there is an economic and a moral imperative to take action. Persistently high unemployment drives poverty up, makes it harder for families to find decent housing, increases family stress and, ultimately, harms children’s educational achievement. For young workers entering the workforce, the current jobs crisis reduces the amount they will earn over their lifetime.

In deep recessions, businesses tend to make fewer critical investments in research and development that can improve our economy’s productive capacity over the long term. Entrepreneurs usually find credit hard to obtain if they want to start a new business. These factors hurt U.S. global competitiveness and growth potential.

That’s why we agree that job creation must be a short-term priority. Job creation plans must be targeted so we can get the greatest return on investment. They must be timely, creating jobs this year and next. And they must be big enough to substantially fill the enormous jobs hole we’re in. They must also be temporary — affecting the deficit only in the next couple of years, without exacerbating our large and growing structural deficits in later years.

Funding key investment and infrastructure projects to promote economic growth and offering a job creation tax credit are among the policy ideas that meet all these standards. In addition, temporarily renewing extended unemployment benefits can lead to more jobs throughout the economy.
But these problems, and the resulting short-term deficits they cause, should not be confused with the primary deficit challenge facing our nation: structural deficits. These deficits are projected to exist in coming years — even when the country is at peace, even when the economy is growing, even when unemployment falls.

Specifically, the deficit could approach an already unsustainable 6 percent of gross domestic product 10 years from now, and will continue to rise thereafter.

While we address our short-term unemployment challenges, we must also immediately establish a path to address our large, and growing, structural deficits.

The Congressional Budget Office projects that after the economy has returned to full employment, spending will still substantially outstrip revenues. Over time, Medicare and Medicaid will be the key drivers of these structural deficits. This is primarily because these programs’ costs tend to mirror overall cost increases for health care, which have risen much faster than overall economic growth for decades, but also because of demographic changes.

Our nation’s fiscal picture will darken further with the passage of time, especially if interest rates increase.

These structural deficits are too substantial to close the gap without addressing both sides of the ledger: spending and revenues.

In doing so, it is important to distinguish critical and effective programs and tax policies from outdated and ineffective ones.

We must be careful to maintain the type of public investments that can help fuel broad-based economic growth while strengthening the safety net for our most vulnerable populations. And we should take into account growing retirement insecurity as employer pension systems erode and personal savings falter.

People should be able to count on government benefits they are promised. It is, therefore, critical that federal benefit and funding levels be reconciled.

None of this will be easy — not the policy or the politics. It will require hard choices, and an extraordinary process to engage the American people and to make recommendations to the Congress on budget controls, spending cuts and revenue increases.

Getting the deficit under control cannot be accomplished by simply ending “waste, fraud and abuse,” stopping all foreign aid or exiting Iraq and Afghanistan. Substantial progress could be made though by ending the tax cuts of 2001 and 2003, or paying for their extension through spending reductions. In the end, Congress must step up to the plate, not just with hearings, but with votes.

For all the disagreement in Washington, we both know that, like us, there are many who see the critical importance of addressing these challenges. We must accept higher deficits in the short-term in order to put people back to work.

At the same time, we must take immediate steps to agree on a path and a process for reducing the structural deficits that lie ahead.

In a town of division, this is one area where we need a real consensus now.

This entry was posted in Employment, Government Spending, Inflation, Interest Rates and tagged , . Bookmark the permalink.

69 Responses to david walker okays deficits???!!!

  1. Floccina says:

    The reason some economists who do understand the monetary system disagree with Warren on money (or why we have the monetary system that have):

    http://monetaryfreedom-billwoolsey.blogspot.com/2009/10/index-futures-convertibility_14.html

    Doesn’t the illusion of free money interfere with a sound fiscal constitution where voters compare the benefits of government spending programs to the cost of the private goods sacrificed? Isn’t one of the most important element of the fiscal constitution clearly visible tax shares so that voters can make sensible fiscal choices?

    Reply

    Floccina Reply:

    Sorry that was the wrong link above. Here is the correct one:

    http://monetaryfreedom-billwoolsey.blogspot.com/2010/02/james-buchanan-on-constitutional.html

    Reply

    zanon Reply:

    Woosley is crazy. He talks about non-monetary loans and negative interest rates on cash-currency. Anyone who envisions bank lending out goat meat and Federal officials with flamethrowers burning peoples trousers is not to be taken seriously.

    his slavish devotion to sumner also turns the stomach

    Reply

    RSJ Reply:

    This is what private money looks like

    http://www.ritholtz.com/blog/wp-content/uploads/2010/02/ipod_dollar_thumb.jpg

    Mr. E Reply:

    Not only is he crazy, he is a windbag. I cannot abide by reading a few thousand extra words for no real reason. Also, aren’t people supposed to put their conclusion first, then a supporting points, then go and expand on the support, and then restate the conclusion?

    Remember, if you have to read the #@$%# manual, you have a poorly designed device. It is the same for most writing. If you force your readers to read the entire article to get the point, you are a bad writer.

    Reply

  2. warren mosler says:

    a structural deficit represents the changing desire to save needed to return to full employment.

    a rising deficit due to a ‘collapse in demand’ is another way of saying a rising deficit due to a ‘sudden increased desire to net save financial assets’ loosely defining the word ‘desire’ of course.

    over the last two years the deficit has gone up for the most part as the automatic stabilizers ‘automatically’ adjust deficit spending to levels that restore incomes and savings to levels necessary to turn things around, which means to levels where savings desires are met, etc.

    got to run to the airport to catch a flight to nyc. tea party rally in htfd tomorrow

    Reply

    Jim Baird Reply:

    OT, but it turns out Paul Krugman is a neighbor:

    http://www.newyorker.com/reporting/2010/03/01/100301fa_fact_macfarquhar?currentPage=all

    Maybe if you run into him on downtown sometime, you can set him straight… (Of course, he’s an Important Economist Who Already Knows Better, so it’s not likely, but it would probobly be fun to point out his absurdities to his face…)

    Reply

    warren mosler Reply:

    did that a few weeks ago. in plain simple english. he did understand. but seems nothing has changed in his writings

    Reply

    Dave Begotka Reply:

    Owned?

    Tom Hickey Reply:

    I called Krugman out on this again, but this time very explicitly, in his blog post, You’re so vain, where he criticizes Dana Millbank for being disingenuous by feigning.

    But Paul, you know that the government neither has to tax to fund its spending, nor borrow to finance it. It’s been explained to you and you have agreed. However, your public writings do not reflect this, and you are perpetuating the false household-government budgetary analogy that is holding the country hostage to ignorance and disingenuousness. Aren’t you doing something similar to Millbank here by not speaking out?

    Matt Franko Reply:

    Run, Warren, Run!

    Reply

  3. knapp says:

    Greenspan 1, Hillary 0

    Hillary Clinton:
    “I served on the budget committee in the Senate, and I remember as vividly as if it were yesterday when we had a hearing in which Alan Greenspan came and justified increasing spending and cutting taxes, saying that we didn’t really need to pay down the debt — outrageous in my view,” she said.

    “We have to address this deficit and the debt of the United States as a matter of national security not only as a matter of economics,” Clinton said. “I do not like to be in a position where the United States is a debtor nation to the extent that we are.”

    Having to rely on foreign creditors hit “our ability to protect our security, to manage difficult problems and to show the leadership that we deserve,” she said

    Reply

  4. beowulf says:

    My take is he looks at the CBO and OMB projections and doesnt see any future convergence between outlays and revenues and hits the panic button out of ignorance.

    You mean a graph like this?
    http://baselinescenario.files.wordpress.com/2010/01/figure1-4.gif

    By structural deficit, he’s thinking Medicare/Medicaid spending. But that graph is misleading because it shows federal health expenditures and not national health expenditures (NHE), private health insurance costs are rising at even faster rate, so “privatizing” Medicare would increase NHE by more than it reduces federal spending. The futility of Obama’s plan to subsidize private insurance coverage can be seen by this chart. The US spends more, with fewer annual doctor visits and has lower life expectancy than other industrialized world which provide universal healthcare to its citizens (the size of the circle indicates average annual visit to a doctor).
    http://www.stat.columbia.edu/~cook/movabletype/mlm/healthscatter.png

    At the end of the day, the “structural deficit” means that deficit hawks of both parties will continue overtaxing the economy to pay for our wasteful healthcare system. The only alternative is to nationalize our healthcare system. In other words, expanding Medicare to cover everyone and imposing cost controls or, as Philip Longman as suggested, expanding the VA health system to cover everyone. For economic conservatives, its like Sophie’s Choice… higher taxes and private health insurance or lower taxes and socialized medicine.

    The [VA Health] system runs circles around Medicare in both cost and quality. Unlike Medicare, it’s allowed by law to negotiate for deep drug discounts, and does. Unlike Medicare, it provides long-term nursing home care. And it demonstrably delivers some of the best, if not the best, quality health care in the United States with amazing efficiency. Between 1999 and 2003, the number of patients enrolled in the VHA system increased by 70 percent, yet funding (not adjusted for inflation) increased by only 41 percent. So the VHA has not only become the health care industry’s best quality performer, it has done so while spending less and less on each patient.
    http://www.washingtonmonthly.com/features/2005/0501.longman.html
    http://www.washingtonmonthly.com/features/2007/0710.longman.html

    Reply

    zanon Reply:

    Again please. I have personal experience with VA health system and let me give you a clue — the reality is not like what rags like Washington Monthly and NYTimes want you to believe.

    Reply

    Matt Franko Reply:

    Beowulf,
    I like Warrens proposal, I think $5k/yr per capita fiscal transfer should do it with a bit of deregulation. Resp,

    Reply

    zanon Reply:

    btw matt franko, good to see you here. i can see your thinking has progressed since we 1st met.

    Reply

    beowulf Reply:

    Zanon, fair point. I haven’t been in the VA hospital in years, and only then to visit. And certainly Warren’s proposal is light years better than any proposal either party has put forth. So I’ll amend my rant to merely— “hey, take a look at these two graphs”. :o)

    Matt Franko Reply:

    Z, Thanks, I dont know where we crossed paths Ive been ‘on board’ with this MMT or ‘in paradigm’ (to my limited abilities) prob for 2/3 yrs. Ive have been tyring to engage people at other blogs I come across who are not of the MMT view and often I guess am taking a roundabout approach, (its difficult to inject yourself into an exchange between people who are hardover in the mainstream!). Ill often use the form of questions to try to lead them, or analogies, etc…it often fails and probably doesnt reflect well on me. But I really do think its never been more important than at this time (economically/socially) for people in The West to lose their inapplicable beliefs in how the national Treasuries operate in FFNC currency regimes, so Ill probably keep trying! Resp,

    zanon Reply:

    Matt Franko:

    we first met on UR, which remains infested with austrians. If you knew MMT then you hid it well, although you have come a long way since then for sure. And good luck fighting the good fights.

    Michael Coburn Reply:

    “The futility of Obama’s plan to subsidize private insurance coverage can be seen by this chart.”

    That presupposes that “Obama’s plan” had the primary objective of addressing the cost of medical care. That was not the primary objective of this INITIAL PHASE and it was realized at the time of the House bill that the Public Option and national exchanges would be necessary to achieve some cost control. The Senate destroyed the original plan and we are left with an expansion of health insurance that will be funded more by the middle and entrepreneurial classes than by the wealthy (the House bill had moved the burden of health care for low income folks from middle class cost shifted insurance premiums to the very wealthy with incomes in excess of $1M). The bought and paid for Senate also insisted on fracturing the group that would have been formed by a national exchange and the Public Option into state based puny no power non profits just like the ones that already exist. The task for now is to broaden the Medicare tax in order to recover the giveaway to the rich and to do all that can be done to create a larger pool inside a national exchange where all insurance companies can sell insurance to any person in any state based on the minimum standards. The “cost control” must be addressed and the middle class must have relief from the burden of the poor.

    Reply

  5. Mishel and Walker’s definition of the structural deficit is perfectly clear and is in line with the usage of the phrase I’ve seen a hundred times before. They say in reference to the structural deficit, “These deficits are projected to exist in coming years even …… when unemployment falls.”

    I.e. the deficit can be divided into two portions. First, the part that is supposed to deal with the recession. Second the part which will remain (unless something is done about it) even after the recession ends (because government is collecting insufficient tax and is borrowing as a substitute – for a given level of spending).

    Thus contrary to Scott’s suggestions, the structural deficit has nothing to do with the private sector’s desire to save. I.e. it’s the other part of the deficit – the “part that is supposed to deal with the recession” that deals with increased private saving.

    Reply

    Scott Fullwiler Reply:

    My point is they are projecting a deficit in excess of the private sector’s desire to net save at full employment GDP. There is nothing wrong with having a structural deficit, per se, as positive desired net saving would indicate it should be the norm. But Walker, et al. have done NO ANALYSIS to demonstrate that the projected deficit will be in excess of this level, and thus inflationary, which is the only macroeconomic issue to be concerned with in this case, and neither has anyone else.

    And if they did do the analysis, they would probably find that the vast majority of any projected excessive deficit (according to my definition here) is due to growth in healthcare spending and costs in excess of anticipated GDP growth (this is very likely, since anticipated future deficits are about 80-90% due to these factors according to CBO, etc.). Thus, if anything, there is a healthcare crisis, not a future deficit crisis.

    Until we get clear on what we are talking about when it comes to a “structural deficit,” we will continue to (a) not be able to fashion decent policy response (though it will probably take more than this to craft a decent policy give the US political culture), and (b) run the risk of crafting “solutions” that make things a whole lot worse.

    Reply

    Scott Fullwiler Reply:

    Also, I’m fully aware of the typical use of the term “structural deficit.” My original point above is that this definition is not useful, so I was proposing a more useful one up in #3.

    Reply

    Min Reply:

    I want to thank all of you to responding to my questions and rants. It is educational. :)

    zanon Reply:

    Scott:

    You are redefining a well understood term to mean something else. It is not good strategy.

    The term “structural deficit” is exactly what Ralph says and you know. And it is useful to the extent that people want word to define that number. I would want that term AND i understand MMT.

    Instead of redefining this well understood term, and creating confusion, why don’t you come up with new term for “non-govt sector desiring to net save at full employment GDP”. Maybe call it “full employment deficit”.

    Now, structural deficit may be larger or smaller than full employment deficit. If it is smaller than full employment deficit, then you see high employment and you should cut taxes/increase spending. If you see it as being higher than fell employment deficit, then you either raise taxes on workers at that point in time (which they may anticipate and not like) or you cut benefits. If you cut benefits, probably best to do so incrementally and early so those near, but not at, retirement can adjust.

    See? Is useful term and useful concept

    Reply

    Scott Fullwiler Reply:

    Pretty good. I was trying to point out that a structural deficit could be very necessary over even the very long run, since most think “structural deficit” is by definition bad, even deficit doves.

    I do like your terms (both of them) better, as they capture exactly what I was describing.

    Tom Hickey Reply:

    Economics is not exactly a science, especially relative to policy-making. Words have many meaning involving both denotation (reference) and connotation (emotion). “Structural deficits” are like the government-household budgetary analogy. The phrase gives the impression that deficits that are built in, with the implication that this is due do to “welfare spending.” In this sense “structural deficits” imply that a balancing the budget, aka “fiscal responsibility,” is out of reach unless the “profligate” spending is cut.

    George Lakoff explains how this kind of terminology works to promote the conservative moral view. He summarizes this in Obama, Tea Parties, and the Battle for Our Brains over at Cognitive Policy Works. Mishel walks into Walker’s trap here. This is how conservatives get people to vote against their interests and hoodwink liberals into going along with this.

    zanon Reply:

    Oh please Tom. Economics is not a science in any way. Where are the falsifiable experiments with controls? I know what science looks like and economics is not it. The problem is not “words” as economics is filled with equations but absolutely devoid of reality.

    Lakoff is a moron and idiot. democrats were lapping him up when they thought he held key to electoral victory. and also it looks like you fall for that arrogant “what’s the matter with kansas” nonsense. I assure you the problem is not with ppl of kansas.

    Tom Hickey Reply:

    Zanon, I agree was being overly kind to economics. The fact is that disagreement among major schools along political (ideological) lines shows that a great deal of what is said is not descriptive, that is, fact-based, but prescriptive, i.e., preference-based.

    I would be interested i hearing your rationale for saying that GL is moron and idiot, however. I think that what he has been saying base on studies in cognitive science supports the above.

    Cognitive research reveals that there is such thing as “reality.” Humans cognize in terms of their brain structure and functioning, which is rational-emotional-physical rather than only rational. That means that imprinting influences the what the one’s apprehension of “reality” is structured.

    Conservatives and liberals populated different conceptual-linguistic worlds, so to speak. This is the widespread conclusion of cognitive scientists, and it was foreshadowed by Kant’s philosophical insight in the Critique of Pure Reason hundreds of years ago, albeit with a rational bias that did not sufficiently incorporate “embodiment.”

    zanon Reply:

    Tom:

    Read lackoff book (you show tolerance for nonsense given your positive citation of “what’s matter with kansas”) and make up your own mind. i strongly recommend you actually go and live in rural kansas, or any isolated rural community for a year or two, and then ask yourself again who knows whose best interest best. The answer will have made itself obvious.

    Tom Hickey Reply:

    Zanon, I have read Lakeoff’s books and many other things in cognitive science because this cognitive stuff is related to my field. I have also lived in a several rural environments in different sections of the US — South, Midwest, and West, and I am currently living in southeast Iowa, only a few miles from Kansas. We clearly have a different perspective on things.

    zanon Reply:

    Of that there is no doubt!

  6. xy says:

    But surely the non-government sector can also net save by investing in real assets…? If G – T = 0, NX = 0, and the non-government sector wants to save x amount of its income, as long as that is balanced by x amount of real investment (S = I), there’s no AD leakage. Right?

    Reply

    RSJ Reply:

    No, for every buyer of the real asset, there is a seller of the real asset. If the seller is also in the non-government sector, then this nets out so that the non-government sector is not net saving in the real asset. The only way for the non-government sector to be a net buyer of real assets is for the government sector to be a net seller of the same assets.

    Reply

    xy Reply:

    Wait, I’m confused. If I build a factory and sell it to you, how am I dissaving? And if the factory was second hand, it wouldn’t contribute to Y for this period anyway–right?

    Reply

    Zaid Reply:

    Xy,

    You are right if the accounting identity S=I is to hold. Investment can increase through expansion of horizontal money, where in this paradigm financial assets net to zero. But the real assets built through investment do increase net worth of the private sector, and accounting logic dictates that saving goes up by the same amount.

    We forget why deficit spending is required in this type of environment. Horizontal money is shrinking, and the desire of the private sector to net save cannot be satisfied by the its current level of investment. The government’s role would then be to create saving in the form of “net financial assets” by deficit spending.

    RSJ Reply:

    XY,

    If you build a factory and sell it to me, then cash is flowing from me to you. I am the dissaver and you are the saver. The money you saved is the money I spent, so on a net basis we have not saved.

    zanon Reply:

    xy,

    Of course it is possible for economy to increase its stock of real assets all by itself. I can put my labor into any number of things and build stuff, I can trade that with my neighbor for eggs (he keeps chickens) etc. etc.

    Zaid & RSJ are confusing real with nominal. Private sector can absolutely increase real assets (which book at equity — although valuation is tricky) all by itself. Private sector is only reliant on Govt sector for net FINANCIAL assets (which is nominal).

    Zaid Reply:

    Zanon, I think we are in agreement. I am speaking nominally when I reference the real asset created through investment. Saving is the accounting record of investment, right?

    If I borrow $100mn to build a factory, by balance sheet looks like this:

    Assets Liabilities
    +Cash $100mn +Debt $100mn

    The Banking System’s balance sheet looks like this:

    Assets Liabilities
    +Loans $100mn +Deposits $100mn

    Now, I go and pay the labor market to build me a factory. Labor market’s equity goes up, and so does their saving:

    Assets Equity
    +Cash $100mn +Net Worth $100mn

    And my balance sheet now has a factory building on the Asset side:

    Assets Liabilities
    +Bldg $100mn +Debt $100mn

    Did I miss something?

    Zaid Reply:

    Let’s make it more simple: in a one sector model (nongovernment sector), spending on investment generates income that is not spend on consumption because, nominally, the only consumption goods available for sale are those associated with spending on consumption goods, not investment goods. Nominally, this investment spend can only be saved. This saving is non-volitional and is dependent on the amount of investment spending.

    Zaid Reply:

    To make it more simple: in a one sector model (nongovernment sector), spending on investment generates income that is not spend on consumption because, nominally, the only consumption goods available for sale are those associated with spending on consumption goods, not investment goods. Nominally, this investment spend can only be saved. This saving is non-volitional and is dependent on the amount of investment spending.

    zanon Reply:

    Zaid:

    Let’s make it even more simple.

    Say you have pre-money barter economy. Or even one man island economy. Can it increase its capital stock of real assets? Of course it can, by using time and labor to make stuff. Note that it does not need any money at all to do this.

    I have found that this usually makes real and nominal different completely clear. Add consistent accounting to it and we are saying exactly the same thing. But I think it is helpful to stress the difference between nominal and real very clearly here.

    Zaid Reply:

    Ok, I get you. We’re defining the word nominal differently. I think you are referring to “financial” assets vs “real” assets. In which case we are in agreement.

    If you note in my first answer above, I mentioned that financial assets net to zero. In other words, the non-goverment sector cannot create net financial assets by itself. Net financial assets have to come from government deficit spending.

    But saving can still occur in a one-sector model because, as you point out, the capital stock of real assets can expand without having net financial assets expand. In the factory example above, suppose the labor market decideds to spend the cash on my factory, and I use that cash to pay back the $100mn loan. Then on a maco-level, the whole sector’s balance sheet looks like this after all loans are repaid:

    Assets | Equity
    +Factory Building $100mn | +Net Worth $100mn

    So, now all financial assets net to zero. And in the process of investment, the net worth (equity) of the nongovernment sector went up by the same amount as the nominal cost of the building. Note the way I use the word “nominal” to indicate the accounting valuation for the factory building as opposed to the “market” value. Saving in this case is accounted for in the nominal valuation of the factory building. In other words, saving is the accounting record of investment.

    Mr. E Reply:

    We’re going to get this question from both honest and dishonest people over and over.

    Reply

    Xy Reply:

    RSJ @ February 27th, 2010 at 4:17 pm,

    “If you build a factory and sell it to me, then cash is flowing from me to you. I am the dissaver and you are the saver. The money you saved is the money I spent, so on a net basis we have not saved.”

    I don’t think that’s right. Paper wealth has not increased because of this transaction, but you have “saved” in the sense that you now have a real asset worth whatever you paid for it, so that even though money has moved from you to me, you still have that money *in* the asset you know own.

    Yes?

    Xy Reply:

    Zaid & Zanon,

    I agree with what you’re saying. The private sector can save on its own by building up its net worth (or equity) through investment in real assets.

    So lets say that the private sector wants to save 4% of its income, and that this is matched by an equivalent amount of real investment so that the equilibrium condition S = I holds. Ignoring the foreign sector, in this state there is no particular need for deficit spending.

    Is that corrrect?

    Zaid Reply:

    Not exactly. Saving in a closed economy with no government is non-volitional (paradox of thrift), and it becomes entirely dependent on investment by the private sector. In your example, the government cannot satisfy the private sector’s desire to save if the private sector is investing less than 4% of its income. So, there is a need for deficit spending to meet the private sector’s desire to save 4% of its income.

    Take the current environment as a case study. Investment is falling very fast, and if it weren’t for government creating net financial assets by deficit spending, the private sector would reduce spending even further to satisfy their desire to net save; this is a self-reinforcing process that causes income to go down in a downward spiral.

    See Paradox of Thrift (http://en.wikipedia.org/wiki/Paradox_of_thrift)

    Zaid Reply:

    Sorry, I think I misread your statement. If saving desires are met by the private sector’s investment level, then you’re right, there is no need for government to create net financial assets. However, a prolonged period of levering through investment can cause instability in the economy. Look up Minsky for some interesting explanations on why this makes the system unstable.

    Xy Reply:

    Cheers. Can you point me to a specific paper?

    Zaid Reply:

    “In the skeletal model, with highly simplified consumption behavior by receivers of profit incomes and wages, in each period aggregate profits equal aggregate investment. In a more complex (though still highly abstract) structure, aggregate profits equal aggregate investment plus the government deficit. Expectations of profits depend upon investment in the future, and realized profits are determined by investment: thus, whether or not liabilities are validated depends upon investment. Investment takes place now because businessmen and their bankers expect investment to take place in the future.” (Minsky, Financial Instability Hypothesis)

    See
    http://www.levy.org/pubs/wp74.pdf
    And
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=161024

    RSJ Reply:

    XY,

    “I don’t think that’s right. Paper wealth has not increased because of this transaction, but you have “saved”

    No, you have not saved. Investments can be “real”, but savings are always “paper”, or monetary. You invest in real assets, you cannot save in real assets. If you start making up your own definitions, then indeed you can call investment savings if you like, but this just muddles discussions.

    Real assets require expenditure of funds in order to build, maintain and operate them. You do this in order to realize a financial return, and there is a risk that you will not get the return.

    Therefore all real assets carry a financial liability — the expected return of that asset. If you lease a storefront, you are investing, and incurring a liability to make enough revenue to at least cover the lease. You are not saving. If you borrow money to expand a factory, you are investing — you are incurring a liability to make at least enough money to repay the debt. You are not saving. Even if you spend your own money and do not borrow to build the factory, you are still drawing down your savings in order to make the investment, and in your own “books” you expect that factory to earn some return, whether or not that expectation is codified in a legal debt agreement. So your stock of savings has decreased and your stock of real assets has increased. The act of doing this is called “investment”, not “saving”.

    The ownership claims specifying who gets how much of the profits of the factory are the financial assets corresponding to those liabilities.

    zanon Reply:

    This is definitional thing.

    “Saving” really does need to be defined as “not spending”. This means it is taking income, and then not spending it on anything else.

    RSJ: Real assets do not carry financial liability–they do not carry expected financial return.

    I build a shed in my backyard using labor and time. Or I grow my own vegetable. Those are real asset. There is no expected financial return.

    Get real and nominal straight.

    ZAID: Please what is different between nominal and financial. I use them interchangably. both are just numbers, as opposed to stuff.

    RSJ Reply:

    Zaid,

    An asset is defined as something that generates a stream of income, and therefore has a liability attached to it. A pencil is not an asset. A shed in your backyard is not an asset. You can impute some value to it in terms of money saved by not renting a workshop, for example, and in that way view it as an asset if you want, but you have to be careful when doing this. In that case, the liability is that expected income stream. Again, you need to be careful with these definitions. Saving must be defined financially, it cannot be real. What on earth would be the GDP deflator of “savings”? If savings was a “real” thing that could be bought, then it would show up in NIPA expenditure accounts — it does not, investment shows up in the expenditure accounts, and savings appear in the NIPA income account. So you are confusing nominal and real here.

    Zaid Reply:

    Zanon: I’m using nominal in the accounting sense, by booking the building at cost, irrespective of its perceived market value (see Cost Principle of Accounting). A financial asset is a claim on some other asset (real or financial).

    RSJ: Saving is income not spent. S = I is only an equality in terms of $ value, but it doesn’t mean that saving is the same thing as investment. Investment can produce a real asset like a factory building. Would you agree that saving is the accounting record of investment?

    zanon Reply:

    Zaid: You have a definition of nominal that is unhelpfully narrow in this context, although of course you are using word in correct way also.

    When people talking about “real” vs “nominal” they mean “real” vs “nominal” wishing to include prices adjusted and not adjusted for inflation.

    Whatever, you know this well.

    Zaid Reply:

    Words can have many meanings. Even “real” vs “nominal” GDP, for example, uses the words in a completely different meaning. “Real” in this sense has nothing to do with real assets but is meant to indicate an adjustment for inflation.

    I didn’t mean to confuse, but the word nominal means different things in my daily job. We normally use the word “nominal” as a face value of some asset.

    RSJ Reply:

    There are many thorny issues here related to the intuitive notion of the terms versus the accounting definition, versus the operational realities driving the accounting definition.

    The word “savings” connotes self-denial and deferred consumption. It is moral — e.g. “thrift”. In reality, the level of “savings” due to deferred consumption is negligible. Most savings is better understood as profits. Both are defined as revenues-expenses.

    “investment” connotes building factories. But again in reality, most “investment” is for residential real estate purchases or consumer durables. Productive investment is small in comparison to increases in household debt.

    However, in the accounting sense, savings is just revenue – expenses, and investment is just expenses-revenue, so by definition S = I at all times. Moreover, that is the *only* sense in which S = I. All the NIPA adjustments (e.g. buying a can of beans that you will eat 3 years from now is called investing, buying inventory that you can’t sell is called investing, etc.) are done to beat this revenue-expenses equivalence out of the macro aggregates, while maintaining the appearance that you are measuring something “real”.

    Operationally, savings is absolutely the accounting record of investment, as no one can force you to be in a deficit position, but everyone wants to be in a surplus position. Being in a cash-flow deficit position requires that you borrow or increase your liabilities (in relation to your financial assets), and people’s willingness to do this depends on expectations of future return, which are volatile. That is just as true for SUV and house purchases as it is for building factories.

    The result of these volatile investment decisions then determines the aggregate level of liabilities issued in the economy, which is the aggregate level of profits, or gross accumulation of financial assets. This number we call “savings”. Operationally, the investments (e.g. financial liability issuance) funded the savings (financial asset accumulation).

    Xy Reply:

    RSJ,

    I can assure you, I have no desire to invent new definitions for commonly understood terms.

    I define an asset as a resource controlled by the entity in question as a result of past events and from which future economic benefits are expected to flow. I define a liability as a present obligation of the entity arising from past events, the settlement of which will result in an outflow of resources embodying economic benefits. I.e., a liability is a kind of negative asset.

    I am having trouble making sense of your statement that “all real assets carry a financial liability—the expected return of that asset”. The expected return of the asset is future cash flow (or something more amorphous but equivalent), but future cash flow is not present claims on future cash flow. Of course, if the entity borrows money to pay for the real asset, it does incur a present obligation to settle in the future. But this depends on how the asset purchase is funded.

    My thinking re saving is like this: If I save ten ducats out of my income and spend them on a new cow, I agree I no longer have the ten ducats. But I do have a new resource worth that amount, plus the expectation of future economic benefits (milk, cheese, etc). So although I have lost the ten ducats, I have gained an asset worth ten ducats that I could swap back into financial form if I wish, plus the expected gain of diary produce that I will be able to swap for cash or use to reduce my own outgoings with in the future. I could have just bought a lot of cheese and ate that—the money would be gone—but instead I bought an asset that retains (holds/stores) value and generates more.

    As you can see, I’m easily confused. Cheers.

    Also, where does this leave us re my initial question?

    zanon Reply:

    xy:

    regarding your initial question, answer is depending on what you mean.

    private sector can delever by itself by simply paying down debt (shrinking horizontal money). private sector can increase its stock of real assets of course all by itself, even without money, just buy building things with sweat of its brow. You would book this on balance sheet as asset and equity, but valuation is whatever. To avoid this issue, just book asset as the thing itself, ie. “1 wooden shack” on ignore translation to nominal terms/$value.

    private sector cannot increase NET financial asset by itself for reasons gone into above.

  7. 1. A structural deficit is simply the non-govt sector desiring to net save at full employment GDP. If the structural deficit is actually larger than non-govt sector desired saving at full employment GDP, then the economy’s AD is not at full employment GDP, it is beyond it, and you have AD-induced inflation.

    2. The proactive act of getting rid of a structural deficit creates a cyclical deficit unless the non-govt sector simultaneously decides to reduce net saving by an amount equal to or greater than the attemped reduction in the structural deficit.

    Reply

    Min Reply:

    Thanks, Scott. :)

    “A structural deficit is simply the non-govt sector desiring to net save at full employment GDP.”

    But that’s not what Mishel and Walker are talking about, right? They mean something else by “structural deficit”. No?

    Reply

    Min Reply:

    Well, maybe they do have the technical meaning in mind, but then aren’t we in lala land?

    M&W: “While we address our short-term unemployment challenges, we must also immediately establish a path to address our large, and growing, structural deficits.”

    Well, we obviously do not have a structural deficit now, since we are far from full employment. In fact, when was the last time we were? Did we have a large structural deficit then?

    “The Congressional Budget Office projects that after the economy has returned to full employment, spending will still substantially outstrip revenues. ”

    When do they project full employment? Not for many years, right? And we are not even talking about a prediction, are we? What are the error bands on that projection?

    I do not mean to minimize the problem of spiraling health care costs, but that is a problem we face now, whether we project a structural deficit several years from now or not. This whole discussion of structural deficits has an aura of unreality about it.

    Reply

    winterspeak Reply:

    What they mean is this, and they have a sliver of a point (if even that):

    Much of the deficit spending factored into the US has no link to the “non-govt sector desiring to net save at full employment GDP”. It is driven by a number of politically popular programs triggered by demographic shift. Whether the actual deficit they generate is bigger or smaller than the non-Govt sector desire to net save at full employment GDP is a roll of the dice.

    Just as there are automatic stabalizers built into the system, there are also automatic destabalizers, (any Govt spending program with built in CPI adjustments being a prime example).

    People don’t like how the distribution deck is getting stacked against them in the event of the deficit being large enough to lead to AD-inflation (as unlikely as that seems right now)

    Michael Coburn Reply:

    The talk of “structural deficits” and medical costs is a method for attacking government and that is all it is. The involvement of government in the economics of health care will not, in and of itself, make any difference whatsoever regarding the problem of rising costs due to demographics and the desire of rich old men to live forever.

    Whether the government runs a health insurance system or not, the demographic problems are not going to change. The political “right” would have us believe that all we need do is get government out of the mix and the problem will go away. That is true. But it will only be true because the less well off elderly will die prematurely. Left to the “free market” that is the natural outcome.

    Matt Franko Reply:

    Michael C,
    Maybe that’s why the American Pathology Foundation is so eager to hear what the Concord Coalition has to say that they have invited them to present at their spring conference this year. If Concord gets it’s way, those Pathologists look forward to all the autopsy work coming their way! Healthcare Concord-style: Autopsying the dead bodies.

    Matt Franko Reply:

    Min,
    Ive got one of Walkers latest appearances
    here at this link.

    You have to read between the lines as he does not define the term but he does use the term “structural deficit” several times.

    My take is he looks at the CBO and OMB projections and doesnt see any future convergence between outlays and revenues and hits the panic button out of ignorance. He also has a book out. Im not going to buy/read it as I already read “Bankruptcy 1995″ in 1992. Resp,

    Reply

  8. About a third of the U.S. (and U.K.) national debt corresponds the monetary base. How many people regard the $20 bills in their wallet as a “debt” owed to them by the Fed? Or as Willem Buiter put “These base money ‘liabilities’ of the central bank are not in any meaningful sense liabilities, because they are irredeemable.”

    Will someone please tell the deficit terrorists, neurotics and economic Neanderthals that a third of the national debt is not a debt at all? Moreover, the interest paid on this chunk of national debt is paid by the Treasury to the Fed: it’s just money going round in circles, isn’t it?

    Reply

  9. Min says:

    Excuse me for repeating myself, but I just wrote this over on Mark Thoma’s blog ( http://economistsview.typepad.com/economistsview/2010/02/initial-weekly-claims-for-unemployment-insurance-increase-to-496000.html#comments ):

    “The term, “structural deficit”, is another example of the conservatives’ framing of the issue. There is no such thing, properly speaking, as the structural deficit, at least, not as a “challenge facing our nation”. What is the structure of such a “structural deficit”? There is none. What there are ongoing governmental programs and expenditures, and there are recurrent deficits. There is nothing in the fact of these government programs that requires us to run these deficits. We could, in fact, run surpluses, like Clinton did not too long ago. “Structural deficit”? Bah!

    (Aside: Now, there is something about our ongoing deficits that might be called structural, related to how we have structured our monetary system. Running deficits is how we put money into the economy. As a rule, that is a boon, not a challenge.)

    The reason for using the term “structural deficit” when talking about social programs is as a scare tactic. “Deficit” is a scare-word, and “structural” suggests that we are helpless against the threat of deficits unless we take drastic action to change the very nature of government. This is pure rhetoric, and to accept the term is to lose the argument.”

    Am I wrong?

    Many thanks. :)

    Reply

    Tom Hickey Reply:

    I suspect that what Walker is referring to is the “unfunded obligations” created by SS, Medicare, and Medicaid. The chief objective of conservatives is to get rid of these as government programs by privatizing what is profitable and killing the rest.

    Reply

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