…because I’m an economist and a mom–that’s why!

Bush Tax Policy Doesn’t Pay for Obama Spending Policy

April 14th, 2010 . by economistmom

Of course, it didn’t pay for Bush spending policy, either, but the point is there’s even more of a disconnect between the revenues raised under the Obama-proposed Bush tax policy extended and projected Obama-proposed spending.

The above video clip from CNN’s IOUSA Solutions special (simply titled “Federal taxes fall short of spending” and featuring me on the panel and my boss Bob Bixby in the film) makes this simple point:  There’s a huge gap between spending and revenues, and no one solution, and in fact no “simple” solution (such as trimming only the defense budget or cutting only “waste, fraud and abuse”) will suffice.  And on the eve of the dreaded “Tax Day”, this should remind us that revenues, i.e., Taxes, will (unfortunately) have to come up.  But again, as only one part of the not-so-easy solution.

(Oh, and by the way, despite this story in yesterday’s Washington Post, I do think that gap between spending and revenues is still “huge”–even if it turns out to be “only” $1.3 trillion and not the Administration’s originally forecasted $1.6 trillion.  That was yet another way in which the Obama Administration seems to be continuing the federal budget practice of the prior Administration in ways I just don’t “get.”)

52 Responses to “Bush Tax Policy Doesn’t Pay for Obama Spending Policy”

  1. comment number 1 by: SteveinCH


    I’m sure you get a round of hear, hears from your regulars on this. My question for you is how we move past this discussion. Somehow, some way, people have to start putting specific solutions on the table that solve the problem so that those solutions can be debated.

    Listing the potential solutions is nice but ultimately uninspiring because it’s only a very small first step in the required problem solving.

    An idea for Concord if you want to get into the game. Run a conjoint analysis on a subset of solutions with a large number of citizens to try to determine the utility among voters of different elements of the solution. If I worked for Concord or Peterson or if I were independently wealthy, that’s what I would be doing to try to advance the dialog.

    I think we all know that the public will not like any solution to the problem. The question is what solution produces the least negative responses of the credible answers to the problem.

  2. comment number 2 by: AMTbuff

    It’s pathetic to see how the media focus has shifted to fiscal responsibility immediately after the government has added $1 trillion or more to its near term commitments. Where were these scare stories when HCR was being debated?

    The public is not fooled. Taxpayers will not accept massive new taxes to pay for health care change they opposed. Repeal of HCR must precede any bipartisan support of major tax increases. Republicans will refuse to be the tax collectors for ObamaCare.

    If Republicans can repeal ObamaCare, then a bipartisan VAT is a strong possibility. Assuming the bond market crash does not occur first, that is.

  3. comment number 3 by: Brooks


    To your point, yesterday I was imagining the “aren’t I great, different, responsible, rational and straight-talking” speech that Obama may give around December, after the mid-terms and whatever output comes of his fiscal commission. I imagined Obama giving the speech he should have given before and as context for the healthcare “reform” debate, lecturing the nation essentially on the need to grow up both in terms of the necessity of major sacrifices and the need to compromise vs. one’s ideal set of sacrifices and accept broad-based sacrifice, including whatever may be one’s favorite program or tax break or tax rates. And of course, many will rightly reply, “Why the hell didn’t you deliver this message before creating an expensive new entitlement that will be politically nearly impossible to dramatically cut, so we could consider whether or not we wanted to do it, or do it on that scale, within the rational framework of the overall problem we need to solve and the various combinations of sacrifices that could form a solution, so we could decide where such a new entitlement would fit among our priorities?”

  4. comment number 4 by: AMTbuff

    And of course, many will rightly reply, “Why the hell didn’t you deliver this message before creating an expensive new entitlement
    It’s actually worse than that. He created the $1T in new spending in the most completely partisan action in living memory. Burning all the bridges was a great disservice to the country, probably greater in long-term cost than the $1T.

  5. comment number 5 by: SteveinCH

    I think you’re both assuming the commission is going to deliver a recommendation that’s meaningful and specific.

    I rather doubt that will happen unless a few of the “Republican” members sign on to a tax only solution for the short term issues (getting to 3% in 2015) and there are no specific recommendations on a long term solution, just some nice words.

  6. comment number 6 by: Brooks


    No, I’m not making that assumption, particularly if by “recommendation” you mean a plan that gets the 14 votes. I do consider it more likely than not that there will be some “output” (I chose that word carefully) that is either some plan(s) or at least identification and quantification of various measures that could be part of a plan but on which no agreement was reached.

    I also think there is a significant chance (say, 30%) of getting to 14 votes on a plan to reach that 2015 goal with a combination of tax increases and reductions in projected spending, but that isn’t a necessary premise for my point above.

  7. comment number 7 by: SteveinCH


    Fair enough. I guess I was thinking Obama would only make the speech if there was an actual plan to go along with it but, on reflection, there’s no reason why that should be a precondition.

  8. comment number 8 by: Brooks

    Yeah, either way he could have an angle: With a recommendation from the commission he could be urging the public and Congress to get behind it, without agreement on a recommendation he can emphasize how important it is to “overcome our differences”, “work together to solve the problem”, which, after all, “isn’t a Republican problem or a Democratic problem but an American problem”, yadda, yadda.

    And all that after he made his first top priority the creation of that new, expensive, entrenched-upon-arrival (meaning at least upon implementation) entitlement before lecturing everyone on the need to take a comprehensive view with “everything on the table” and the need for compromise, etc.

  9. comment number 9 by: Brooks

    Maybe he’ll wait until his SOTU to deliver that ironic “more responsible than thou” speech. Most likely, the commission will not have reached 14 votes and recommended a particular long-term plan that comes anywhere close to solving the problem, and Obama will offer no such plan of his own, nor even the outlines of such a plan, but that won’t stop him from lecturing the nation on the necessity of “making tough choices” and “overcoming partisanship”, blah, blah, blah.

    To which Paul Ryan should respond:
    “Mr. President, I’ve presented a comprehensive, detailed plan, scored by CBO, that solves the long-term problem.* You’ve acknowledged that I’ve offered a real plan, a serious plan. You’ve also said that my plan is not the way you would want to solve the problem, and that’s fine. Let’s have that discussion and that debate so the American people can see the options and express their preferences. But that can only happen if you actually present an alternative plan that solves the long-term problem. It can’t happen if all you do is say you don’t like my plan and you offer no alternative plan. You and other Democrats can score some political points if all you do is criticize my plan, but that’s not leadership and that won’t save our country from disaster. I’m just a Congressman with a small staff, yet I’ve developed and offered a real plan so we can move past the vague, empty political rhetoric about ‘responsibility’ and ‘tough choices’, and start talking seriously about a solution. You’re the president of the United States with all the resources you need to develop an alternative plan if you really want to do so. When will the American people see your plan to solve our long-term fiscal problem?”

    * I’m referring to his plan on the spending side. From what I’ve heard his full plan may not accomplish as much due to lower tax revenues.

  10. comment number 10 by: Matt Franko

    The CNN Editors caption on the video reads:

    “Taxes account for only 39% of the $2.1T 2010 budget and the Feds will have to borrow $1.4T to make up the gap”

    This would properly be stated:
    “Deposits into the Treasury’s account at the Federal Reserve are projectied to be 39% of the projected withdrawals from the Treasury’s account at the Fed in FY 2010. In accordance with historic normal procedures related to Monetary Policy, the Treasury will of course issue Treasury Securities in the amount of the projected $1.4T amount by which withdrawals are expected to exceed deposits. Have a nice day!”

    That is all that is required, nobody is going to “borrow” anything.


  11. comment number 11 by: Brooks


    How ’bout you give it a rest, at least here. I haven’t bothered getting into the weeds with you, because my sense is that your bottom line is either absurd or meaningless. Steve tried to get you to make sense and was very patient with you. Please don’t continue to comment over and over on this blog with the same absurd or meaningless point.

    Our debt held by the public is real debt that must be paid back by taxpayers, at least above a tolerable or desirable level of debt-to-GDP (and the same for deficits), which we are projected to greatly exceed. Wild monetization to “inflate our way out” may not even be feasible and even if it is, would bring terrible, greatly injurious inflation. If you think it’s all monopoly money and the amount of Treasury borrowing and debt doesn’t matter, please find some whack-job Fed-conspiracy blog on which to post the point repetitiously.

  12. comment number 12 by: Matt Franko

    Yes Brooks, you and Ron Paul who believe (thru your “sense”) that the Sovereign Government of the U.S. has the same legal authorities as a household with a joint checking account must be the experts here. I guess all of these people are “whack-jobs” too:

    James K. Galbraith, Professor, Department of Government, University of Texas at Austin.

    L. Randall Wray, Professor of Economics, University of Missouri-Kansas City.

    Scott Fullwiler, Associate Professor of Economics and James A. Leach Chair in Banking and Monetary Economics at Wartburg College.

    Pavlina R. Tcherneva, Assistant Professor of Economics at Franklin and Marshall College.

    Bill Mitchell, Research Professor in Economics, University of Newcastle, NSW Australia.

    I could go on…

    Some of these people have spent decades of their academic careers in scholarship, studying and analyzing modern monetary systems (post gold standard) and the related effects on fiscal policy.

    Nutshell from Mitchell: A basic premise of Macro 101 is the national sectoral balances equation:

    (I – S) + (G – T) + (X – M) = 0

    That is the three balances have to sum to zero.
    The sectoral balances derived are:

    The private domestic balance (I – S) – positive if in deficit, negative if in surplus.
    The Budget Deficit (G – T) – negative if in surplus, positive if in deficit.
    The Current Account balance (X – M) – positive if in surplus, negative if in deficit.

    To try to advocate for a macro economic policy that only addresses the second term of this equation (Budget Deficit) while ignoring the effects that such an adjustment would have on the other sectoral balances (by definition!) is sophomoric and inadequate advocacy and analysis.

    A comprehensive and objective fiscal policy analysis in 2010 has to include an analysis using the framework of Modern Monetary Theory that some of the economic professionals I have referenced above have spent their careers developing.

    Advocacy organizations that soon adapt to include this framework will certainly retain all professional and academic credibility.


  13. comment number 13 by: Brooks


    I’m not going to waste much time with you, but just to check if your point is something different from what it seems to be, let’s cut to the chase. Give me direct, straight answers to the following questions:

    1) You seem to reject the notion that the projected long-term fiscal imbalance (for the next few decades per current policy) is a big problem we need to solve via changes in projected tax revenues and/or projected spending? That is, if we continued per current projections (or tried to) for the next few decades, do you disagree with everyone who says there would eventually be severe adverse economic consequences whether via very high interest rates and/or very high inflation?

    2) Do you think that our ability to “print money” means there is no such threat, and/or that actually printing as much money as we wish to spend above and beyond tax revenues would/could solve any problem related to projected deficits and debt, without huge adverse consequences due to inflation?

    3) I think Steve asked you this, but: What if we didn’t tax at all and just “printed” as much money as we wished to spend — and if we spent as much as we wanted on everything we desire, since we can create as much money as we want to spend, and doing so has no adverse consequences?

  14. comment number 14 by: Matt Franko

    1. The high intrest rates and the kind of inflation you cite is not a fait accompli. (See Japan). Please see the very easy to understand paper by Scott Fullwiler I linked to above for the detailed analysis of such deficit spending.

    2. Your question kind of assumes that a fiscal deficit is a problem by definition. I do not accept that all deficits are “a problem”, no. See the equation above…if the US is running a high current account deficit and bank credit is imploding (like recently), even with large deficits we can have still have DE-flation. Pavlina Tcherneva’s paper I linked to above identifies the tradeoffs here, they can be monitored.

    3. Youre bordering on Steves $T strawman with me here. The govt of course cannot spend on real goods and services that do not exist, if they try to do so, that would by definition cause inflation. At our current rate of underemployment and pathetic utilization rates, we are faaaaaaar way from having to worry about this.

    Brooks, Concords focus should be adjusted to get involved with developing fiscal econometric models that monitor price stability but under/in relation to the MMT framework that recognizes all three of the terms in the simple equation above and the monetary system realities post gold standard. …You cannot just adjust one of the terms in the equation without other effects on the US economy that if not addressed, will cause massive unemployment and other signifiacant disruptions to our citizens. We owe ourselves an economy that is better than that.

    Brooks, this is real macro. Concord can be a contributor, but its going to have to get out of 1992 and into 2010. Expand it’s horizons to also address the other two terms in the equation above.
    These two other terms are also controlled by Congress/Govt thru trade and banking regulatory policies and Concord can add more value to the national discussion by going beyond it’s current narrow focus on just fiscal deficits.

    Diane here and Bixby should set up a meeting/have dinner with some of the academics Ive referenced in the above post. Many are also scheduled to be in DC area on the 28th of April for an MMT seminar an Im sure would not oppose an academic exchange. I may be able to be of assitance.

    Concord certainly has the expertise in PR and public advocacy and I believe the MMT academics have the correct analytical framework, if we could just get the two groups working together for the Country, you wouldnt believe the economy we could have!


  15. comment number 15 by: Brooks


    ok, I did the nice thing and offered you just enough benefit of the doubt to give you a chance to give me direct, straight and sensible answers to clear, fundamental questions. You didn’t (and perhaps can’t) provide such answers. I only read through your response #3. Not wasting more time with you. If you have a valid and worthwhile point to make (which is still possible, but seems unlikely) you sure make it unnecessarily difficult to see what it is. And before you flatter yourself unjustifiably, I’m not referring to the complexity of your presentation of macroeconomics, equations, etc. I’m saying you apparently are unable to be clear about your bottom line point. Waste someone else’s time if you must, but preferably not on this blog.

  16. comment number 16 by: Brooks

    Oh, and Matt, next time you engage with someone on this, lose the confusion or straw man (whichever it is). Every time you are asked about the long term, you answer about the very short term (the current weak economy with slack, etc.)

  17. comment number 17 by: Jim Glass


    What Brooks said:

    “next time you engage with someone on this, lose the confusion or straw man (whichever it is). Every time you are asked about the long term, you answer about the very short term”

    Nobody is arguing about the short term, it’s the long term that matters.

    As to the effects of rising debt under current policy in the long term, CBO has projected this

    “Sustained and rising budget deficits would affect the economy by absorbing funds from the nation’s pool of savings and reducing investment in the domestic capital stock and in foreign assets. As capital investment dwindled, the growth of workers’ productivity and of real (inflation-adjusted) wages would gradually slow and begin to stagnate…

    “this scenario would cause real gross national product (GNP) per person to stop growing and then to begin to contract in the late 2040s (see Figure 3).4 By 2060, real GNP per person would be about 17 percent below its peak in the late 2040s and would be declining at a rapid pace. Beyond 2060, projected deficits would become so large and unsustainable that the model cannot calculate their effects.”

    The economy crashes in the 2050s. No “75-year projection” is possible because the economy pretty much ends circa 2060.

    Of course, that means the big problems really arise a lot sooner, with the credit rating of the US crashing in the 2020s. Because an economy projected to crash in the 2050s makes it rather difficult in the 2020s to sell bonds maturing 30 years later, in the crash.

    Which is why S&P, Moody’s and Fitch all project the sovereign credit rating of the US to start plunging circa 2020, with S&P pojecting it will plunge to “junk” by 2027.

    (To be accurate, these CBO and S&P projections were made just before the recession — today the long-term projections are a lot worse, of course).

    Now, Matt, if you’d like to address these long-term concerns to allay them (perhaps with some insight so simple that even my ol’ usenet buddy Warren Mosler can understgand it — yet so deep and profound that it is not known by CBO, nor any of the rating agencies, nor any of the 40-or-so govt’s that have defaulted on their debt since Nixon put an end to the final vestage of the gold standard) … please do tell!

  18. comment number 18 by: Turkey Man

    Matt’s right. See some of the links. You’re all doing analysis as if the US was on the gold standard. Get a clue.

  19. comment number 19 by: Turkey Man

    And, oh yes, the CBO quote is garbage. Loans create deposits. There’s no ‘pool of savings’ that deficits drain. Quite the opposite. Businesses invest more when the economy’s humming along, and if the private sector can’t get us there on its own, deficits will help and lead to more capital, not less. Again, get a clue, before it’s too late.

  20. comment number 20 by: SteveinCH

    So it’s a vast conspiracy involving all of us and the government and 99% of academic economists and leading business people to make us all poorer than we need to be by continuing to believe that we actually have to generate the money to pay debts by means other than printing it?

    I mean, after all, if it weren’t a conspiracy, how could so many people be wrong? Would you mind having the treasury credit my bank account for a trillion dollars since it’s all just transactions in a register?

    Assuming Turkey that you are just not Matt by another name, I’d invite you to find another site as well. You won’t convince anyone here and you don’t add much to the argument by saying the sun rises in the West.


  21. comment number 21 by: Turkey Man

    Right, China prints $ that we need to borrow from them. Keep believing that, and the Earth is flat, too. A lot of people once believed that, and it didn’t stop them from being wrong. And the 99% of academic economists that didn’t see the crash coming, they’re probably right, and the people Matt’s linking to that had been warning probably are the ones that are crazy. Have fun here, folks!

  22. comment number 22 by: SteveinCH

    Thanks, we will

  23. comment number 23 by: Matt

    Brooks & Steve,
    Sorry Ive been away from inet.

    Brooks I gave you pretty direct answers and referenced scholarly work for further info. That is not some complicated equation and Im not trying to impress anybody, it is just linear algebra. I thought I was pointing it out due to its simplicity!

    No one is saying that it is a conspiracy, where did I (or Turkey man now) say it was a conspiriacy? Im just saying that your (and others cbo, ratings agencies, etc) analytical framework is off base. I interpret your approach as one that thinks the US is still on the gold standard in a way, with a form of a convertable currency. Its like your approach didnt change when we went off gold.

    Lets face it, your framework literally assumes that in 2010 the US Treasury and US Central Bank have the same authorities as a 19th century housewife putting money in and taking money out of a cigar box. This is indeed not the case.

    Jim Glass, the ratings agencies downgraded Japan in the late 90s to that lower than Botswanna, and they still issue 10 yr govt bonds at 1-2%. QUIZ: Please identify the ONE sovereign that has defaulted on its Govt debt that was denominated in it’s own currency over your time frame:

    You all are a hard nut to crack :)


  24. comment number 24 by: Brooks


    If you think you actually answered my questions, you are a very, very funny man. Try again, if you wish, to actual give actual answers to my actual questions. Or if I have to dumb it down for you, start by just answering these simple questions: Can we just print all the money we need to pay for all the long-term projected spending (for the next several decades) without great adverse consequences due to inflation and/or high interest rates? If so, why tax at all, and why limit our spending at all?

  25. comment number 25 by: Jim Glass

    Jim Glass, the ratings agencies downgraded Japan in the late 90s to that lower than Botswanna

    You mean they lowered Japan all the way to AA, the second highest rating of all, where it remains.

    And “by lower than Botswanna” you imply that would a bad thing. But Botswana has been the great growth economy of the world — 9% growth for more than 20 years(!), way more than China. While Japan was in perpetual recession during those late 90s and after, Botswana continued that 9% growth while running a fiscal surplus, and a trade surplus too, with only negligible debt (that it was reducing!). All of which gave it a solid A investmment-grade credit rating, The best in Africa. Maybe it deserved better!

    So what is this bogus rhetoric, “lower than Botwsana”?

    Were you invoking some kind of anti-African economy prejudice to have people imagine Botswana as a failing country? Or do you really not know that Botswana has been one of the great economic growth success stories of the world? Either way, not so good.

    Hmmm… Japan downgraded all the way to AA. Botswsana supposed to deserve a poor credit rating.

    Tut, tut. Time to upgrade the rhetoric. :-)

    QUIZ: Please identify the ONE sovereign that has defaulted on its Govt debt that was denominated in it’s own currency over your time frame:

    Only one? Russia defaulted on its ruble-denominated debt in 1998, very famously.

    But you really should consider domestic defaults — govt defaults on debt denominated in their own currency to domestic borrowers. Thus, no complications of foreign exchange etc., but also often not noticed outside the country. The Reinhart/Rogoff survey gives 40-odd of them (counting just since Nixon closed the gold window). Did you know there were so many?

    Then of course there have been all the external and domestic defaults that would have occurred but for renegotiaton, with the borrowers forced to concede terms, and all the effective defaults-by-inflation to pay back less-than-borrowed in real terms. Scores of both of ‘em. Lots and lots of own-currency defaults and effective defaults by inflation since the end of the gold standard. “One”?

    And in each and every case the govt knew it could simply make bank deposits to pay its bills, if it wanted to. In the cases of effective default via inflation, that’s what they did!

  26. comment number 26 by: Jim Glass

    Hmm, looks like my html editor messed up the formatting of that last one. Sorry, I’ll be changing that.

  27. comment number 27 by: Matt Franko

    Jim Glass,
    Point taken on Botswanna as rhetoric. But you bring up an interesting point. In your paragraph wrt this you state: “while running a fiscal surplus, and a trade surplus too, with only negligible debt (that it was reducing!). ” Do you agree that via the sectoral balances equation that this identity dictates that due to Botswannas net exports (by definition, and if it is large enough) they will run the surpluses you cite? ie if they were not net exporters but instead large importers and bank credit was nil, they would by definition have to run large fiscal deficits? Do you agree with the universal applicability of this equation?

    PS will get back wrt R/R.

  28. comment number 28 by: Turkey Man

    For Reinhart/Rogoff,see these

    Yes, there can be costs to large deficits in the future, but the costs are in terms of inflation since insolvency is self imposed.

    But how much inflation will there be? 3%? 5%? 10%? 20%? 100%? The fact that neither you nor anyone else including CBO can give any sort of answer to that shows that the true costs of excessive deficits have not been understood or considered.

    Let’s look at Social Security. Over the past 70+ years it’s risen from as a % of GDP from 0% to 5%. It’s projected over the next 30+ years to rise from 5% to 7%. Doesn’t seem like a crisis to me.

    For Medicare/Medicaid, yes, very big problems there. But, even CBO’s analysis shows that most of the increase in these is due to rising healthcare spending overall as a % of GDP. Slowdown growth in healtchare spending vs. growth in GDP, and Medicare/Medicaid problem mostly goes away.

    So, we mostly have a healthcare crisis, which Obamacare did almost nothing to fix in terms ofgrowing costs IMO, not a Social Security crisis and not a Medicare/Medicaid crisis.

    Also, you can’t fix this healthcare crisis by pretending it’s a fiscal crisis and slashing Medicare/Medicaid, since seniors and poor will still need healthcare if you do that. The problem hasn’t been solved, and is probably worse, if you pretend it’s a fiscal crisis.

    Getting back to inflation, the other part of CBO’s projectsion for future deficits is based on rising debt service. But rising deficits don’t necessarily mean rising interest on the debt for a non-convertible currency issuer. See Japan. CBO’s assumed interest rates will rise to a level greater than nominal GDP growth, and that’s where they get that. But the only way rates rise that much is if the Fed puts them there, and the Fed only puts them there if the economy’s doing real well, and if the economy’s doing real well then the deficit has shrunk considerably on its own due to automatic stabilizers (see late 1990s).

    Getting back to Matt’s equation, what do you think are the consequences for the private sector if you actually do reduce deficits or even run large surpluses in the future? You get the exact opposite for the private sector, that’s what. So what you’re really proposing when you suggest long run surpluses for the US is long run deficits for the non-govt sector. Not smart.

    I’d like to return to the CBO quote above I criticized earlier. Do any of you on this blog actually believe there is a fixed quantity of funds that banks can lend out, and that when the government runs a deficit it reduces this quantity? If so, you are violating the basic double-entry accounting fact that loans create deposits. Banks don’t use reserves, deposits, or any other “funds” to make a loan.

  29. comment number 29 by: Matt Franko

    Can we just print all the money we need to pay for all the long-term projected spending (for the next several decades) without great adverse consequences due to inflation and/or high interest rates?>>>>Yes, but of course not “printing” per se.

    If so, why tax at all, >>>Brooks, this is a good question. Here is a post Mosler made at Huffington Post today that addresses some of this issue.

    and why limit our spending at all?>>>Spending needs to be limited to prevent price instability (you might call inflation) if the Govt provides balances that exceed the economy’s ability to provide the comensurate amount of goods or services.


  30. comment number 30 by: Brooks


    ok, so your answer is “yes”, we can just create as much money as we wish to spend (the only constraint being something along the lines of “as much as the economy can provide”) while not taxing at all and there won’t be any great adverse consequences.

    That’s all I need to know to be almost certain that even the very limited benefit of the doubt I initially gave you and the very limited amount of time I’ve spent in this exchange have been far too generous. Maybe the other side of your split-personality, Turkey Man, will show up now to defend you. Everyone else with any sense of economics (or any common sense for that matter) can see you are a nutjob. I’m sure you participate on blogs with fellow nutjobs of the same sort, so maybe you should stick to those, where you won’t waste the time of people with a clue who are nice enough or curious enough to give you a chance to make sense.

  31. comment number 31 by: Matt Franko

    I’ll just point out here that I and one other poster have made some topical comments/points based on fundamental economic principles/facts, ie sectoral balances, reserve accounting, historic record of credit agency downgrades, the exit of the US from the gold convertability, cited works by scholarly economists, etc…and in response we do not get an intellectual response we get called whack jobs, racist, conspiracy theorists, nut job, split personality, etc…nice blog youre running here.


  32. comment number 32 by: Brooks


    Don’t be a baby and don’t criticize someone unjustifiably. What would you prefer — that Diane censor comments like so many blogs do? And bloggers don’t always have time to get involved in debates among commenters, so you shouldn’t presume you are owed that.

    And as for your problem, well if you comment on a site (with sane, sensible people) and spew a bunch of obviously moronic garbage, and even then making it like pulling teeth for others to get you to state your bottom line (as opposed to endless filler, straw men, etc.), yeah, good chance people will call you what you are, not that that’s all you got in response, notwithstanding your distorted characterization of responses as all name-calling. Go be among your fellow whack-jobs where you’ll be happy rather than wasting the time of anyone here who makes the mistake of engaging you.

  33. comment number 33 by: Turkey Man

    “ok, so your answer is “yes”, we can just create as much money as we wish to spend (the only constraint being something along the lines of “as much as the economy can provide”) while not taxing at all and there won’t be any great adverse consequences. ”

    Somebody appears to have difficulty understanding English. It would seem Matt clearly said “Spending needs to be limited to prevent price instability (you might call inflation) if the Govt provides balances that exceed the economy’s ability to provide the comensurate amount of goods or services.”

    Just as I wrote above, the consequence of deficits that are “too big” is inflation, not involuntary insolvency. Now that your question is answered, any desire to take a stab at the qualifying questions I asked in my previous post? Or do you just want to keep misinterpreting Matt’s points?

  34. comment number 34 by: SteveinCH


    So we all admit that the consequence of deficits/debt is inflation? Excellent. Now the only debate we need to have is how much deficit/debt will cause inflation. Well, the factual answer is we don’t know. Sure there are parallels, but no good ones and it’s not as if there’s an ironclad law.

    So now we’re simply engaged in a question of how much risk we want to take of running the economy into a high inflationary cycle from which it cannot recover without a massive amount of pain.

    Matt and Turkey want us all to believe that the risk is small and we should run large deficits in perpetuity. I’m on the other end of the continuum. I believe the government should run a balance budget except during severe recessions (not 3% deficits as many seem comfortable with). The reason for me is the US government actually has relatively little control of the economy and should preserve the flexibility to provide stimulus when needed.

    Running a trillion dollar deficit in a low inflation full employment economy reduces our flexibility to do what we need to do when we need to do it.

    For Turkey and Matt, you both started by saying we didn’t need to limit ourselves. Now you seem to say we do or inflation could result. How much would you say we needed to limit ourselves. Said differently, in a full employment, low inflation economy, what target would you set for the deficit or would you say there is no reason for a target?

    If you say there is no reason, then realize you undermine your argument that there are consequences for large deficits. If you pick a number, we’ll be happy to hear it and debate it.

  35. comment number 35 by: Matt Franko

    Im glad to see somebdy here who understands that the real issue is “inflation” ( I prefer “price stability”) not solvency, but that is NOT what the Peterson crowd talks about, it is all debt doomsday, all the time.

    I would resp point out that your statement that “how much deficit/debt will cause inflation” leaves out the other two factors in the sectoral balances eqution of current account deficit and private sector deficits, these also factor in to any inflatonary/price stability scenario. marshall auerback has a great post today at ND2.0 that shows you how all 3 of these factors play out, recommended you take a look at that, quick read, you will not be sorry you read it.

    I perhaps was saying that we dont need to limit ourselves now (18% underemployment, 70% utilizaton). Youve hit the nail on the head, we need to shoot for “full employment with price stability”. all of this talk about solvency is complete nonsense, we need to get past this. As Ive said before, Concord here can help with this if they take their “blinders” off and expand beyond the singular, incomplete focus of just the fiscal deficit.

    I dont have an exact # for a deficit target % of gdp or something like that because the trade defiict and credit creation also play into it (ie you cannot just fix one of the 3 factors), I would leave the development of such an economtric model to professional economists who know what they are talking about. That should be the task ahead of us vice all of this chicken little stuff about solvency.

    Rep. Ryan was on cnbc this AM (again!) Its like he made a paper airplane once and now he feels qualified to comment on the design of the space shuttle. He is getting some BAAAAD advice and looking foolish to people who know how this stuff really works.


  36. comment number 36 by: SteveinCH


    If you won’t set a target, I can’t take you seriously. Good luck with others.

    Government without a target will spend us into massive inflation eventually.

    And respectfully, if you look upthread in your response to Brooks, you denied that inflation would be the result of large deficits and by your response to me, you are still denying it by saying it is only one of three factors. It is also the only factor we directly control, absent measures like import quotas (which have very negative externalities).

    I’ve stated my preference for zero deficits in a low inflation, full employment economy. The government (through the President) has stated its preference for deficits in the 4 to 5 percent of GDP range in the same conditions.

  37. comment number 37 by: Matt Franko

    I said a large deficit would not necessarily cause inflation. Look at the equation. If (hypothetically) things in China were to fall apart domestically for them, and to remedy they decide to double down on net exports to US and say run the current account deficit to $2T (and we let them), then I submit you could run $2T US fiscal deficits for as long as China maintains that policy with not one penny of inflation (all else equal). See?

    Steve its not as simple as you try to make it by just looking at the one variable.

  38. comment number 38 by: Turkey Man

    “Matt and Turkey want us all to believe that the risk is small and we should run large deficits in perpetuity”

    As Matt points out, this is incorrect. The appropriate size of the deficit is that which sustains full employment level of GDP, and no larger/smaller. This will be a moving target given the procyclical nature of the non-govt sector.

    Over the long run, though, the appropriate size of the deficit will likely average out to be positive, given the non-govt sector’s long run desire to net save. How positive again depends on the long run average saving desires of the non-govt sector at full employment GDP.

  39. comment number 39 by: SteveinCH

    And so that’s not an answer. Let’s assume for the moment that we don’t control the other parts of the equation, absent trade restrictions. Now what?

    By your definition Turkey, the private sector should never invest because the government will take up the slack. It’s not the government’s role to ensure the full employment level of GDP. It’s not even possible for the government to do that unless you have some evidence that says it is. I’d say the cyclicality of every economy since the dawn of man argues the government can’t do this.

    An answer of the form, it all depends, is no answer at all. If you think the system is complex, make simplifying assumptions (e.g., I assume the non-govt sector’s desire to net save stays at its historical average). Under these circumstances, you should be able to provide an answer. The fact that your argument always boils down to “it’s complicated” indicates you have no interest in engaging in a practical (as opposed to theoretical) discussion.

    In my opinion, the current situation requires a practical solution, not a theoretical discourse. If you want to discuss practical outcomes, I’m happy to engage. If you simply want to continue to propagate a theory, I’m no longer interested since that theory seems to effectively say, all things being equal, higher government deficits at some point lead to higher inflation than lower deficits. At that level, I agree to the theory. Recourse to “the other variables will allow us to run large deficits in perpetuity” doesn’t work either conceptually or practically and is not an interesting discussion.

  40. comment number 40 by: Turkey Man


    It’s like Taylor’s Rule. You wouldn’t ask, “what’s the right interest rate?” because Taylor’s Rule doesn’t give 1 correct level of the rate for all times. Same thing here. When the economy’s doing well, the deficit should be smaller, and vice versa. The point is that the state of the economy is what’s important, not how big the deficit is or isn’t.

    “By your definition Turkey, the private sector should never invest because the government will take up the slack.”

    ????? That’s just silly, and it doesn’t follow at all from what I’ve said.

    “It’s not the government’s role to ensure the full employment level of GDP. It’s not even possible for the government to do that unless you have some evidence that says it is. I’d say the cyclicality of every economy since the dawn of man argues the government can’t do this.”

    Wow. Very strange. What sort of evidence are you looking for?

    Also, this isn’t a “theory.” It’s accounting. You can’t violate accounting rules. If one sector is spending more than its income, another sector must be in surplus. There is a govt sector and a non-govt sector.

    The EVIDENCE demonstrates rather clearly that the household sector, prior to 1998 and since 2008, preferred to run a net surplus position at all times. The firm sector’s position moves very procyclically, net borrowing during good times and deleveraging during recessions. The balance for the non-govt domestic sector has been a positive net saving position from WWII to 1998, and since 2008.

    If the current account is balanced or negative, then the only way for the non-govt domestic sector to net save is to have a govt deficit. Again, this is just real wolrd macro accounting identities, not “theory.”

  41. comment number 41 by: SteveinCH

    And still no numbers.

    I’d like evidence that the government can ensure full employment through the business cycle, in any economy at any point in history.

    The numbers are accounting, the results (inflation) are not. They are a theory.

  42. comment number 42 by: Matt Franko

    “It’s not the government’s role to ensure the full employment level of GDP.”
    I say it is….. and so does the law: the Fed has a LEGAL dual mandate of full employment with price stability. Congress can assist in this by adapting to a counter-cyclical fiscal policy (tax cuts etc) with as much as needed as you yourself know solvency is not or ever an issue.

    “It’s not even possible for the government to do that unless you have some evidence that says it is.”
    All we have been doing here is providing such evidence or methods to achieve such.

  43. comment number 43 by: SteveinCH

    Really, show me the section of the law that requires the government (not the Fed which is technically an independent body) to provide full employment GDP.

    Solvency isn’t an issue but inflation is.

    As for evidence, I want evidence that a government can do what you suggest, not evidence that a theory suggests that it could.

  44. comment number 44 by: SteveinCH

    And by can I mean has done. Let me summarize.

    You believe government should choose to run high deficits in the interest of full employment. You further believe that we need not worry about inflation as government does this. And finally, you appear to believe that the nature of the employment (e.g., public vs private sector) is irrelevant to the conversation.

    Let me know if I have any of that wrong.

    What I’m asking for is an example of a government that has voluntarily run high deficits resulting in massive government debt over time that has maintained full employment without triggering a default, a hyperinflationary cycle, or a renegotiation of its debt obligations resulting in austerity measures.

    If there is no such example that your theory of consequence as opposed to the mathematical equivalence of accounting simply remains a theory and a very costly one to test.

  45. comment number 45 by: SteveinCH

    Last para should say than at opposed to that.

  46. comment number 46 by: Turkey Man

    “What I’m asking for is an example of a government that has voluntarily run high deficits resulting in massive government debt over time that has maintained full employment without triggering a default, a hyperinflationary cycle, or a renegotiation of its debt obligations resulting in austerity measures.”

    US during WWII. Two qualifiers, though.

    First, I reject the overarching theme of your question. That a govt hasn’t yet done this doesn’t mean it cannot. If you ran the govt, for instance, it wouldnt’ even try, and most govt’s have held beliefs like yours. Another example, for instance, would be Argentina in the 2000s with its job creation programs there. It’s been documented quite thoroughly that they worked to create jobs and stimulate the economy, but the govt there decided after a few years that it needed to make changes for mostly political reasons.

    Second, all deficits are not created equal. A govt certainly could run very large deficits aimed at creating full employment GDP that creates inflation, for instance just purchasing airplanes from Boeing until there’s full employment would create inflation long before it created full employment. Some of this happened during WWII in US, so wage/price controls were used. Or, the govt could waste the deficits on spending that didn’t really do much of anyting to help the economy, such as using deficits to bailout large financial institutions, as US is doing now and Japan did previously.

  47. comment number 47 by: SteveinCH

    Three years during WWII followed by what you would describe as austerity (meaning budget surpluses) is your example. OK that tells me enough.

  48. comment number 48 by: Turkey Man

    “Three years during WWII followed by what you would describe as austerity (meaning budget surpluses) is your example. OK that tells me enough”

    ???? Who said they were followed by austerity? You said a period NOT followed by austerity–”without triggering a default, a hyperinflationary cycle, or a renegotiation of its debt obligations resulting in austerity measures.” Difficulties with English continuously resurface here for some reason.

  49. comment number 49 by: Turkey Man

    Again, if you’d been paying attention, budget surpluses can be perfectly consistent with full employment. But that just means the non-govt sector has to be willing to be in a net dissaving position. That won’t last, and never has, so once the desired position turns to net saving, the govt sector will need to be in deficit to sustain GDP.

  50. comment number 50 by: Matt Franko

    Steve Link here.

  51. comment number 51 by: Curly

    Obama and the democrats have learned that if you spend more than you take in then there is a day of recogoning comming. I though that the Clintin administration spent wildly then the Bush came along and more spending (eventhough here was dotcom bust, Enron started under Clintin, 9/11, Iraq and two hurricains) and the democrats controled congess for the last two years. With all of this for an example before him Obama chose to work on health care reforms which will add to the debt instead of jobs. If jobs had been restored health care could have reform in a more logical method which would have worked better for everybody. But no, Obama had to do health care because he and the democrats knew that if they did not pass it now while so many people were agnery (at the rich) it would not pass. Now our taxes ARE going to go up and it will cover many more than the top 5% of income. The “rich”, which I am not one, will not be able to pay all the taxes (that the democrats) have propose and make a living. They may just have to leave the country. Companies have done this for tax and other reasons so why not the rich?
    Obama nor the democrats have learned this yet and so they stir up class envy buying all the benefits to be payed for by the rich(?)!

  52. comment number 52 by: Jon Cassie

    The problem with the Bush tax policy was that it didn’t fund the Bush Administration’s spending decisions. You hit that on the head to start with - and it is one of the most important determinants of our present financial condition. The previous administration borrowed trillions of dollars to do two things:

    1. Reduce taxes on the wealthiest Americans by as much as possible.
    2. Fight a war in Iraq that will be paid for by the nation’s current 10-year-olds.

    In my judgment, we have to cowboy-up and pay for the programs that we want in 2010. Unfortunately, we are also required to pay for the ~$12 trillion in programs that the American people wanted in the Reagan, Bush I, Clinton (until 1998) and Bush II administrations.