Daily Archives: July 26, 2011 @ 10:48 pm (Tuesday)

Why there is a deficit

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The main reason we have a large budget deficit is because of all the tax advantaged savings plans- pension funds, IRA’s, insurance and corporate reserve.

All of these financial assets, which compound continuously, represent unspent income.

And unless they are offset by some other agent spending that much more than his income, the dollars won’t be there to be saved in these tax advantaged entities.

And also realize this is an accounting identity, beyond dispute.
Like 1+1=2.
Like how your checkbook must balance or you made an arithmetic mistake.

It works like this:

People work to produce and sell goods and services and someone get the dollars from all those sales.
Those dollars that came from the sales are exactly the amount needed to buy those things in the first place.
If anyone doesn’t spend the dollars he gets from the sales, there isn’t enough spending for the sales to happen in the first place.

So when a large chunk of our dollars that we get paid from wages and profits go into pension funds,
and don’t get spent,
all the things for sale can’t get sold unless someone spends that much more than his income.

And if we (both residents and non residents) don’t want to- or can’t- spend more dollars than our dollar incomes by borrowing dollars to spend,
sales fall short,
so income and jobs are lost in a downward spiral,
that doesn’t end until someone finally fills that spending gap by spending more than his income
to replace the spending power lost when earned dollars go into pension funds.

That’s where the government comes in.
When those dollars piling up in pension funds cause spending to fall short,
government can spend more than its income to make up for that lost spending power, fill the spending gap, and keep everyone working and producing and selling real goods and services.

So right now the high unemployment and low sales tell us there is still a big spending gap to fill.
In the past, this spending gap might have been filled by people borrowing to spend on houses and cars and all that.
But this time around people aren’t willing or able to fill the spending gap.
The current level of government spending that exceeds taxes (deficit spending) is only partially filling the current spending gap.
It’s a big economy and pension funds and corporate reserves are huge and growing,
which means the spending gap is huge and growing
which means the amount government spends that’s more than it taxes (government deficit spending)
is still too small to fill the spending gap.

the answer is quite simple- cut taxes and/or increase government spending until output and employment is restored and the spending gap is filled.

Unfortunately our fearless leaders have a large gap between their ears, and have it all backwards, and we’re all paying the price.

And it will get a lot worse if they keep cutting the government deficit and make the spending gap wider instead of narrower.

(as always, feel free to distribute and re post)

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“Sometimes nothing is a real cool hand”

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Perhaps the chilling reason no bill is even beginning to emerge from Congress is raising its ugly head. Could it be that members of Congress and the President, deep down, want to see the US government go cold turkey to a balanced budget? Like taking away the drugs from an addict, might they all believe it’s for our own good and our children’s future to take away the government’s credit card now, before it’s too late?

We know they all believe that because of the deficit we are on the verge of a Greek like financial crisis. We know they all believe we need deficit reduction to prevent catastrophe. We know they all believe the government has been borrowing from China to spend like a drunken sailor, leaving the debt to our grandchildren. We know they all believe we either make the tough choices now, or soon face the undeniable consequences. And we know they all believe that even the most aggressive packages under consideration won’t be sufficient to solve the problem.

So what’s a patriotic politician to do? What solves the problem and, while there will be near term pain, minimizes the total long term pain? Yes, running out the clock and doing nothing, which is exactly what’s happening. And all the while trying to make sure your opposition gets the blame for the initial pain, while positioning yourself to take credit for the good that will surely follow. Is that not what’s happening?

They are dead wrong, of course, and, consequently, we’re all dead ducks, as the price of nothing is far higher than anything I’ve seen discussed anywhere. With the automatic fiscal stabilizers disabled (Treasury spending can’t increase in a slowdown, and in fact is forced to decrease as revenues fall) the downward acceleration of the economy from the sudden cut in government spending will be far more severe than anyone has begun to imagine. The lack of general concern for what might happen is directly evidenced by the current market complacency, allowing those properly alarmed to get their hedges in place at very attractive prices.

…

What happens in the do nothing scenario?
Stocks go down globally, the US dollar goes up, commodities go down, US Treasury rates fall, credit sensitive interest rates rise, sales and GDP fall, unemployment rises, all in the context of a general global deflationary spiral.

So continue to hope for the best while being prepared for the worst.

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Profits and wages

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Couple of things.

First, corporations currently have low propensities to spend their income, so this means we need a deficit that much larger than otherwise.

Second, this goes back to the ‘labor market’ not being what’s called a ‘fair game’.
That’s because people have to work to eat, while business only hires if it can make a desired rate of profit. So game theory tells us that real wages will stagnate without some form of external support:

Economists at Northeastern University have found that the current economic recovery in the United States has been unusually skewed in favor of corporate profits and against increased wages for workers.

 
In their newly released study, the Northeastern economists found that since the recovery began in June 2009 following a deep 18-month recession, “corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent” of that growth. The study, “The ‘Jobless and Wageless Recovery’ From the Great Recession of 2007- 2009,” said it was “unprecedented” for American workers to receive such a tiny share of national income growth during a recovery.

http://economix.blogs.nytimes.com/2011/06/30/the-wageless-profitable-recovery/

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Pelosi joins tea party

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Pelosi Statement on Proposals to Reduce the Deficit, Avoid Default

Washington, D.C. – Democratic Leader Nancy Pelosi released the following statement on proposals announced today to reduce the deficit and avoid default:

“It is clear we must enter an era of austerity; to reduce the deficit through shared sacrifice.

“The President has called for a ‘grand bargain,’ which provides long-term deficit reduction based on shared values and sends a message of confidence to the markets.

“The latest proposal from the House Republicans is a short-term plan that burdens the middle class and seniors, and continues this debate about whether we will default in a few months from now.

“Senator Reid has put forward a responsible plan to reduce the deficit that protects the middle class, and Medicare, Social Security and Medicare beneficiaries. It also includes many proposals already supported by Republicans.

“We must come together for an agreement because our economy and middle class will suffer from a default.”

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Treasury default requires reprogramming

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In case anyone thinks spending is operationally revenue constrained. Unless they reprogram the computers, the Treasury will routinely make all payments on a timely basis. And those payments create ‘real dollars’ in private bank accounts that can be spent regardless of tax revenues, and without borrowing from the likes of China.

And tonight’s speeches seemed to me confirmation of a power move by the Speaker of the House. He announced that on Wed the house will pass a modified bill that the Senate will also pass and send to the President’s desk for signature. If he succeeds, he will emerge as the leader who, from now on, will be the one to organize and have bills introduced and passed by both Houses. And on the odd chance that the economy improves, he’s positioned himself to be the Republican candidate for President.

“Steve McMillin, a former deputy director of the White House Office of Management and Budget under Bush, said Treasury has options but most of them are “pretty ugly.”

If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due — a massive and difficult undertaking. Treasury makes about 3 million payments each day.”

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