Posted by WARREN MOSLER on 19th December 2010
After my brief recap is my response to a very good and typical inquiry I thought I’d pass along.
Meanwhile, the tax cuts were extended, and perhaps a bit of restriction removed, eliminating that source of risk of a sharp contraction that could have happened otherwise.
With the 2%, 1 year reduction in FICA taxes for individuals, arguably traceable to my efforts, there was some consideration of declaring victory and moving on, but I’m feeling more the opposite.
First, it’s tiny and at the macro level the propensity to spend of the recipients is trivial.
And it probably doesn’t even offset the drag from prices for imported crude and products.
And it may just be an interim step in letting the next Congress ‘pay for it’ with Social Security cuts.
The large increase in ‘spending cutters’ are about to take their seats in Washington, with many pledged to kick things off with a $250 billion spending cut, and then balance the Federal budget, along with what could be a majority ready to pass the doomsday bill for a balanced budget amendment to the US constitution.
And a President who seems to think that’s all a good idea as well.
And my nagging feeling that a 0 interest rate policy is highly deflationary, meaning that for a given size govt we need even lower taxes than otherwise, remains.
Lastly, for this post, China has been a first half/second half story, with much of their economic year front loaded into the first half, and they have apparently capped state sponsored lending, which could mean a relatively weak first half, or worse.
The euro zone is forecasting lower growth for next year as austerity bites and the ECB’s job becomes more problematic, as slower growth will slow the ‘fiscal improvement.’
And the recent extreme absurdity of the ECB raising more capital serves to highlight the risk of having incompetents in control.
I continue to review your book. A question or thought I come back to a lot lately is what is the long term implication of national debt.
- Should the federal deficit and associated payments be taken completely out of the budget discussion?
Yes, especially in conjunction with a permanent 0 interest rate policy and the tsy selling nothing longer than 3 mo bills.
That seems to be what is implied on page 32, when you state that “Nor is the financing of deficit spending of any consequence”. I take that whole section to mean that in any year the ability to consume output is not impacted by prior consumption and spending rather it is impacted by the current economic environment and ability to pay, and that payment on the national debt is not an issue (just moving money from one account to another).
Right. And potential consumption is always what goods and services we are physically capable of producing.
I understand that, but does value (rather than money) get added to the economic system when the transfers are made?
Yes, what’s called ‘nominal value’ is added- net financial assets such as tsy bonds, reserves at the fed, and cash are equal to the deficit spending.
Does it have any impact on inflation or taxation?
Not the deficit per se. Govt spending can drive up/support prices if the spending is on a ‘quantity basis’ vs a price constrained basis.
For example, if the govt offers a job to anyone willing and able to work that pays $8/hour and leave the wage at that level it won’t drive up wages.
But if it decides to hire, say, 5 million people and pay what it takes to get them to work it can drive up wages.
The first example is spending on a ‘price rule’ that says $8 max
The second is spending on a quantity rule that says we pay what it takes to get 5 million workers.
I guess the simple question is if we ran deficits every year forever would pricing or wages be impacted and if so how?
The spending and taxing will have the impact. The deficit is the difference between the two and equal to new savings of financial assets added to the economy. If the deficit spending matches ‘savings desires’ that means the spending and taxing are ‘in balance’ with regards to over all pricing pressures.
Is there a national security concern by having foreign governments having huge deposits in our currency? What if China, or whoever, just started selling their positions in dollars purposely to drive down the dollar’s value, accepting the risk that it would have on its own economy?
There is the risk that China might do that.
But also note that we are currently trying to force China to adjust its currency upward, which is a downward adjustment of the dollar. So at the current time driving the dollar down is actually a national policy objective, albeit one I don’t agree with.
Also, the level of one’s currency doesn’t alter the real wealth of the nation. With imports always real benefits and exports always real costs, the challenge is to optimize ‘real terms of trade’ which means get the most imports for any given level of exports. Here, again, we are going the wrong way as a nation, attempting to increase exports to proactively get our trade gap lower.
I guess what I am trying to reconcile is that if everything has a consequence, I don’t understand what consequence deficit spending has on the long term.
It allows available savings to be added to the economy.
For a given size of govt, there is a level of taxes which keeps the real economy in balance.
Over taxing is evidenced by unemployment/excess capacity, and under taxing is evidenced by excess spending that’s causing inflation.
My assumption, based on history is that there is no consequence. My hunch is that the deficit spending is what pushes the economy along
Yes, though I like to say it’s about removing the restriction of over taxation that allows the economy to move on it’s ‘natural’ course of some sort, of course massively influenced by the rest of our institutional structure.
and supports increases in pricing, which translates into inflation. Even at 2% per year after 100 years prices would be whatever 2% compounded annually over 100 years amounts to. And, in essence that is of no consequence.
Right, while ‘a’ dollar buys less than it used, all ‘the’ dollars are buying a lot more that’s being consumed. That is, real GDP is far higher than 100 years ago.