Awareness | Debate | Action
How economists mislead – ‘Ignorant Deficit Terrorists’ Edition
Courtesy of Peter Dorman of the Econospeak blog, an argument you don’t hear every day … unless you are still in kindergarten: “1 + 1 = 2″
The argument Peter is making is that, for any economy, the total sum of its activity has to equal the total sum of its activity.
Brilliant! Why didn't this occur to me before?
In particular, Peter is making the argument that all the pluses and negatives in the economy have to cancel out:
So, for instance, if government is running a balanced budget and the private sector is spending and investing less than its income, a country has to have an export (trade) surplus to pay for the desire of individuals to save part of their income. If the economy does not have a trade surplus when both government and the private sector are trying to reduce their spending, it will spiral into a deepening fiscal collapse.
No matter what the government does to balance its budget, efforts to balance it will lead only to a bigger budget deficit.
This, Peter swears, is a law akin to a law of gravity.
We can state Peter’s argument another way:
Stated this way, the obvious conclusion to be drawn is that, like the law of gravity, there is a law limiting how much the private sector can save before its saving become excessive. Once this rate of savings exceed the limit on productive investment, the economy will begin to run a trade deficit, and/or, the government will be forced to absorb those excess savings in the form of a permanent budget shortfall.
We can conclude from this that the twin deficits — budget and trade — the US has run since about 1980 results from a massive accumulation of profits that cannot be productively reinvested in the economy.
However, if we were to state it this way, it would be obvious that the problem is not the US budget and trade deficits, but the enormous profits being generated in the private sector well beyond what can be productively reinvested back into the economy. The budget and trade deficits are only symptoms of the illness created by excessive profits.
And, since these profits cannot be reinvested productively, they must find unproductive use — unproductive in the sense that the profits are not being used by capital as capital — i.e., as a means of producing still more profits — but converted into a form that relies on some income stream, such as tax revenue. The drive to maximize profit becomes an insatiable impulse to accumulate ever greater public debt and an ever expanding trade deficit.
In the bizarre and incomprehensible narrative of the progressive economist, the relentless effort to maximize already excessive profits on the part of US corporations and plutocrats is transformed into its opposite: into the “reactionary” effort of “ignorant” Tea Partiers — deficit terrorists — to slow the necessary expansion of public debt.
It never occurs to Peter, that one person’s insatiable hunger to maximize profits is the rest of society’s ever more rapid descent into public, private, foreign and domestic debt. You cannot fix this problem with Keynesian smoke and mirrors.
The problem is that hours of work are too long and must be reduced; profits must be reined in.
This Is What Accounting Identities Look Like
I have been periodically raging against the ignorance of those who would slash fiscal deficits without regard to fundamental accounting identities. Such “serious” people somehow think that public and private debt levels can be lowered simultaneously, without a substitution of foreign assets in domestic portfolios (a current account surplus). It does not occur to them that one person’s debt is another’s asset—too confusing, I guess.
What this means is that, if the private sector is collectively paying down its debts, and the government tries to pare its deficits at the same time, either there is an increase in net exports to finance all of this, or it just doesn’t happen. That’s how it is with identities. Unlike other kinds of rules, they are not made to be broken.
Which brings us to this morning’s news about public finances in Europe: despite the earnest efforts of the austerians, fiscal deficits are not declining. Rather, tax receipts are going down, so that the ex post identities remain in force. As long as the private sector continues to deleverage, further efforts to produce “responsible” fiscal deficits will just lead to lower tax revenues and further spending cuts, in a downward spiral of pointless misery.
It reminds me of a bumper sticker that was popular a few decades ago: “Gravity. Not just a good idea—it’s the law.”
I have been periodically raging against the ignorance of those who would slash fiscal deficits without regard to fundamental accounting identities. Such “serious” people somehow think that public and private debt levels can be lowered simultaneously, without a substitution of foreign assets in domestic portfolios (a current account surplus). It does not occur to them that one person’s debt is another’s asset—too confusing, I guess.
What this means is that, if the private sector is collectively paying down its debts, and the government tries to pare its deficits at the same time, either there is an increase in net exports to finance all of this, or it just doesn’t happen. That’s how it is with identities. Unlike other kinds of rules, they are not made to be broken.
Which brings us to this morning’s news about public finances in Europe: despite the earnest efforts of the austerians, fiscal deficits are not declining. Rather, tax receipts are going down, so that the ex post identities remain in force. As long as the private sector continues to deleverage, further efforts to produce “responsible” fiscal deficits will just lead to lower tax revenues and further spending cuts, in a downward spiral of pointless misery.
It reminds me of a bumper sticker that was popular a few decades ago: “Gravity. Not just a good idea—it’s the law.”
The argument Peter is making is that, for any economy, the total sum of its activity has to equal the total sum of its activity.
Brilliant! Why didn't this occur to me before?
In particular, Peter is making the argument that all the pluses and negatives in the economy have to cancel out:
Net Public Spending + Net Private Spending + Net Exports = Zero.
So, for instance, if government is running a balanced budget and the private sector is spending and investing less than its income, a country has to have an export (trade) surplus to pay for the desire of individuals to save part of their income. If the economy does not have a trade surplus when both government and the private sector are trying to reduce their spending, it will spiral into a deepening fiscal collapse.
No matter what the government does to balance its budget, efforts to balance it will lead only to a bigger budget deficit.
This, Peter swears, is a law akin to a law of gravity.
We can state Peter’s argument another way:
If the private sector accumulates more saving than can be productively invested, this excess savings will generate a public sector and/or trade deficit.
Stated this way, the obvious conclusion to be drawn is that, like the law of gravity, there is a law limiting how much the private sector can save before its saving become excessive. Once this rate of savings exceed the limit on productive investment, the economy will begin to run a trade deficit, and/or, the government will be forced to absorb those excess savings in the form of a permanent budget shortfall.
We can conclude from this that the twin deficits — budget and trade — the US has run since about 1980 results from a massive accumulation of profits that cannot be productively reinvested in the economy.
However, if we were to state it this way, it would be obvious that the problem is not the US budget and trade deficits, but the enormous profits being generated in the private sector well beyond what can be productively reinvested back into the economy. The budget and trade deficits are only symptoms of the illness created by excessive profits.
And, since these profits cannot be reinvested productively, they must find unproductive use — unproductive in the sense that the profits are not being used by capital as capital — i.e., as a means of producing still more profits — but converted into a form that relies on some income stream, such as tax revenue. The drive to maximize profit becomes an insatiable impulse to accumulate ever greater public debt and an ever expanding trade deficit.
In the bizarre and incomprehensible narrative of the progressive economist, the relentless effort to maximize already excessive profits on the part of US corporations and plutocrats is transformed into its opposite: into the “reactionary” effort of “ignorant” Tea Partiers — deficit terrorists — to slow the necessary expansion of public debt.
It never occurs to Peter, that one person’s insatiable hunger to maximize profits is the rest of society’s ever more rapid descent into public, private, foreign and domestic debt. You cannot fix this problem with Keynesian smoke and mirrors.
The problem is that hours of work are too long and must be reduced; profits must be reined in.
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