Sunday, May 29, 2011

The Macro Identity Cuts the Cant

I’ve been pretty busy, and in lieu of writing a real post, I’ll mostly quote Yves Smith:
The reason most people don’t like government deficits is that they are assumed to crowd out private sector borrowing, thus discouraging business investment. But companies in the US, even in the last expansion, were net savers. That pattern has taken hold in advanced economies, even in many emerging economies ex China, since the mid 2000s, and some as early as the late 1990s. Andrew Haldane, the director of financial stability for the Bank of England, confirmed that companies and investors are taking an excessively short-term perspective, which is leading to underinvestment.

In simple terms, the household sector always wants to save. If the business sector also perversely wants to save, then government needs to take up the slack and deficit spend, otherwise wages and GDP will contract (if you run a big trade surplus, you can escape that conundrum, but that isn’t germane for the US). If GDP contracts, debt to GDP gets worse, not better. Conversely, when the economy is strong and the business sector is borrowing to expand operations is when the government sector should run a surplus.
What she is doing here is simply applying the fundamental macro identity, one of whose forms is that the sum of private and public budget positions plus the current account is zero. I’m increasingly convinced that just starting from the relevant version of the identity eliminates the 90% of economic debate that is nonsense. After that we can start discussing the other 10%—like whether the net savings of the business sector are only due to short-termism. (I think not, but that’s another, longer, more time-intensive post.)


TheTrucker said...

If a nation has the military power to enforce the use of its currency on a world wide basis then that nation can manipulate its currency with impunity. If the kings and the sheiks are made aware that this militarized nation will replace them with puppets should they accept anything other than this nation's currency in exchange for their oil then this nation controls all of the world that is not self sufficient with regard to oil.

The unit of account in which your "identity" is defined has value only because of the decree of the military power. That is true for all fiat money of any kind. The concept of economics is supplanted by fascism in its true form:

Fascism, now and always, believes in holiness and in heroism; that is to say, in actions influenced by no economic motive, direct or indirect. And if the economic conception of history be denied, according to which theory men are no more than puppets, carried to and fro by the waves of chance, while the real directing forces are quite out of their control, it follows that the existence of an unchangeable and unchanging class-war is also denied - the natural progeny of the economic conception of history. And above all Fascism denies that class-war can be the preponderant force in the transformation of society....

The Republicans simply do not believe in the realities of economics. For them, the rich are appointed by God and are his emissaries. It really has nothing to do with Hayek. And this is why the "identity" is meaningless to a Republican/fascist. It is meaningless to such folk because economics is meaningless. God, guns, and gays.

TheTrucker said...

"The reason most people don’t like government deficits is that they are assumed to crowd out private sector borrowing, thus discouraging business investment."

That may actually be true of a few "economists" who are not very alert. But it is ever more true that these supposedly erred "economists" are shills for the right winged ideology that feeds them. And this fear of "crowding out" is not really the primary concern of the general public who elect our government.

For the most part, the public is very concerned over losing their Social Security and Medicare benefits because of government's failure to control its OTHER taxing and spending. The proper focus for economists that want to make a difference is to differentiate between the costs of government (military, police, prisons, courts, roads, bridges, and possible education) which are CONSUMED taxes and the insurance premiums being paid into the social insurance systems. These premiums (e.g. Medicare and FICA taxes) are not consumed by government and do not add to the size and cost of government. All of the funds are returned directly to the public with no "conversion" to anything else. Money goes in and money goes out. No bombs, roads, bridges, or Senator salaries. And if the Republican definition of "socialism" is factual, then _ALL_ insurance systems are socialism whether they are run by a blood sucking private entity or an open books accountable government. The persons paying the premiums (social insurance taxes) are the persons funding the address of any insured event. Insurance is not a case of personal savings and "earned privilege". It is a social construct whether it is barn insurance or boat insurance or medical insurance or Social Security.

Don Levit said...

Trucker wrote:
These premiums are not consumed by government and do not add to the size and cost of government.
That may have been Roosevelt's intention, but the only premiums not consumed by government are those needed to pay current benefits.
The excess premiums and interest (which is debt, not cash) is loaned to the Treasury to pay for all those consuming items you mentioned.
I can provide government documentation to support my statements.
Can you do like wise?
Or, are we supposed to put more credence in Trucker than the SSA, GAO, Treasury, etc.?
Don Levit

TheTrucker said...

In the year 2000 the federal budget was in surplus to the tune of 86.6 billion dollars, and the debt owed to the public fell by about 200 billion bucks PDF WARNING __ .

Now all you have to do, Don, is splain why the government that was in surplus needed to borrow the 200 billion from the SS trust fund.

The FICA tax PROCEEDS were burned in a furnace and T-bonds were placed into the SS trust fund. The debt owed to the public went down by 200 billion and the debt owed to the fund went up by 200 billion leaving the national debt pretty much UNCHANGED.

That money was _NOT_ consumed by the government to build roads and schools and to pay teachers. It was used to pay down the debt owed to the public. The public debt that was created by the Reagan and Daddy Bush Republicans.

The SS trust fund is what is owed to the FICA tax payers by the thieving Republican income tax cutters.

Don Levit said...

You wrote that the FICA tax proceeds were burned in a furnace and T-bonds were placed into the SS trust fund.
You also wrote the money was not consumed by the government, but was used tp pay down the debt held by the public.
Can you provide any objective third party sources to support these statements?
On Monday, I will provide those sources for you and others that totally refute your statement the proceeds were used to pay down debt held by the public. You say that the excess FICA proceeds and interest were not used for consumption purposes, and actually lowered the deficits because of that.
My sources will attest that they did not lower debt held by the public, but increased debt held by intragovernmental holdings (the debt the Treasury owed to the SS trust fund, by borrowing from it for consumption purposes).
Total debt was indeed raised by the amount of intragovernmental loans.
I hope in the next 2 days you can come up with something more credible than the words you apparently wrote out of thin air.
Don Levit

Don Levit said...

From a paper entitled "Analytical Perspectives, Budget of the U.S. Government, Fiscal year 2009:"
Page 183 "Why are Social Security and Medicare not shown as Governmental liabilities in Table 13-1?
There is no bright line dividing Social Security and Medicare from other programs that promise benefits to people, and all the Government programs that do so should be accounted for similarly.
Furthermore, treating taxes for Social Security or Medicare differently from other taxes would be highly questionable."

Page 195 "The trust fund surpluses could have added to national saving if overall government borrowing from the public had actually been reduced because of the trust fund accumulations.
At the time Social Security or Medicare redeems the debt instruments in the trust funds to pay benefits not covered by income, the Treasury will have to turn to the public capital markets to raise the funds to finance the benefits,
JUST AS IF THE TRUST FUNDS HAD NEVER EXISTED." budget/fy09/pdf/spec.pdf.
Don Levit