Forum Thread

US govt deficit is endogenous

Reply to ThreadDisplaying 2 Posts
  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
    Are you sure you want to delete this post?
        
    I try to keep Modern Monetary Theory (MMT) as simple as possible. This is not always possible as some questions are quite complex. But I don't believe economics to be as complex as brain surgery. Economics is not rocket science. Most of it is just basic logic. The problem is the US economic profession was takeover decades ago by the neoliberal school, which subsequently politicized economics, including basic accounting. This is has led to bipartisan stupidity and completely dysfunctional government.

    In this post, I'm going to explain how the non-government decision to save determines the size of the government deficit. That's what is meant by endogenous deficits. The currency issuing government does not determine the size of its deficit: the users of the currency do.

    Now, if that seems odd, let's think it through: if nobody saved, ever, our spending would go on until every dollar had been taxed out of existence by the government. So without adding in the banking sector, government spending would equal tax revenues. If you add the banking sector, and the tax revenues resulting from the spending from lending, the government would be in surplus. Since nobody is saving, we can effectively rule out a trade deficit or trade surplus. The only way it is possible to run a trade deficit with the world (foreign sector) is if the world wants to save in US currency, and the only way to run a trade surplus with the world is if we save in foreign currency. So no saving=balanced trade.

    Now, people want to save and people have to save, whether day-to-day, over a year, or decades. On a day-to-day basis, people have to save because people have to sleep. You might not think of the funds in your checking account as 'savings,' but those funds in your checking account represent unspent income, by definition, and that's savings. So people are saving to spend in the future, at some point, while others are saving for a rainy day, or to pass those funds onto their children when the die.

    For any agent (govt, foreign, or domestic) to save, another agent (govt, foreign, or domestic) has to run equally sized deficits, or that amount of output does not get sold, and there's that much less in incomes to save, and thus less aggregately saved. That's the Paradox of Thrift.

    If the foreign sector is saving in our currency by selling us their stuff for dollars in excess of what we sell them of our stuff for their currency, the domestic private sector or the government has to run an offsetting deficit or that amount of output does not get sold in our country.

    Now, the domestic private sector can run deficits, but its on the basis of finite credit worthiness, as such it cannot go on forever w/o going into Ponzi. Furthermore, the domestic private sector is not a single entity. We are not all going to decide to take out loans b/c the foreigners are saving in our currency.

    The government, on the other hand, has no such constraints because it is the issuer of the currency. In fact, what we call federal borrowing is nothing more than the government accepting savings deposits from the non-government and offering interest.

    So, government decides how much to spend, and at what level to tax at, and then the non-government determines the size of the government deficit based on its decision to save.
  • Center Left Democrat
    Democrat
    Flagstaff, AZ
    Are you sure you want to delete this post?
        
    CBB:


    your timing is impeccable, since I just did a study about taxes and government spending this morning .. I titled it
    "a brief history of taxes" .. in the interest of time, I'll simply re-post it below:

    **********************************************************************************************

    prior to 1913, the United States raised money through the imposition of tariffs . .

    around that time period, tariffs were reduced, apparently in an attempt to spur free trade ..

    http://en.wikipedia.org/wiki/Revenue_Act_of_1913

    the taxes weren't exactly punitive .. the highest tax rate was only 7%, and that applied to people earning the equivalent
    of $11,000,000 in today's dollars .. people with income levels of "only" $1,000,000 a year had a rate of 3.00%

    after the first year, of course, the rates went up - a lot ..

    WWI caused the rates to zoom from a top rate of 15% in 1916 to a top rate of 77% in 1918 ..
    WWII caused the highest marginal rate to increase to 94%

    http://www.taxpolicycenter.org/taxfacts/Content/PDF/toprate_historical.pdf


    the highest ever marginal rates during "peace time" (92%) occurred when a Republican (Eisenhower) was President - and the economy was booming:

    http://www.usgovernmentspending.com/spending_chart_1950_1960USb_13s1li011mcn__US_Gross_Domestic_Product_GDP_History

    they started to go down in 1964 when a Democrat named LBJ took office, and kept going down after that until another Republican,
    George H.W. Bush (read my lips, no new taxes) took office . .

    in 1993, a DEMOCRAT named Bill Clinton raised them again - the economy was booming - and we were on track to ELIMINATING the national
    debt by the year 2010 - even the "Contract with America" that Newt Gingrich brought in couldn't undo the tax hike -

    http://www.indexmundi.com/united_states/gdp_real_growth_rate.html

    when George W took over, the top marginal rate was lowered by 1% - and the economy tanked -

    at the end of WWII, the national debt, in relation to GDP, peaked at around 120% - Congress DID cut taxes to spur the economy, but
    86.45 % isn't much different from 94% -

    the tremendous growth that took place after WWII didn't come about because we cut government spending - it came about because
    of GROWTH in the economy due to INVESTMENTS (including the G.I. Bill and the Interstate Highway System) that the government made

    http://en.wikipedia.org/wiki/United_States_public_debt

    if you're Congressman tells you that we have a spending problem, not a revenue problem, tell him to read his history book ..

    remember,

    you won't get this information on FOX News ..

    *********************************************************************************************

    I was an Economics major in College, and later taught college level Economics courses for 7 years ..

    in spite of that, though, discussions of Economic theory have me thinking fondly of the scotch bottle, so the average person is likely to
    be befuddled ..

    another example of how the right wing media can mislead people about Economic facts is posted below:

    http://tohell-andback.blogspot.com/2011/03/that-damn-obama.html