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USG deficits: The Economics, the Politics, the Banksters and You.

April 13th, 2011 by selise

The Economics:

James K. Galbraith: In Defense of Deficits

… a big deficit-reduction program would destroy the economy, or what remains of it, two years into the Great Crisis.

For this reason, the deficit phobia of Wall Street, the press, some economists and practically all politicians is one of the deepest dangers that we face. It’s not just the old and the sick who are threatened; we all are. To cut current deficits without first rebuilding the economic engine of the private credit system is a sure path to stagnation, to a double-dip recession–even to a second Great Depression. To focus obsessively on cutting future deficits is also a path that will obstruct, not assist, what we need to do to re-establish strong growth and high employment.

L. Randall Wray: “Teaching the Fallacy of Composition: The Federal Budget Deficit

We hear politicians and the media arguing that the current federal budget deficit is unsustainable. I have heard numerous politicians refer to their own household situation: if my household continually spent more than its income year after year, it would go bankrupt. Hence, the federal government is on a path to insolvency, and by implication, the budget deficit is bankrupting the nation.

That is another type of fallacy of composition. It ignores the impact that the budget deficit has on other sectors of the economy. Let me go through this in some detail, as it is more complicated than the other examples.

We can divide the economy into 3 sectors. Let’s keep this as simple as possible: there is a private sector that includes both households and firms. There is a government sector that includes both the federal government as well as all levels of state and local governments. And there is a foreign sector that includes imports and exports; (in the simplest model, we can summarize that as net exports—the difference between imports and exports—although to be entirely accurate, we use the current account balance as the measure of the impact of the foreign sector on the balance of income and spending).

At the aggregate level, the dollar spending of all three sectors combined must equal the income received by the three sectors combined. Aggregate spending equals aggregate income. But there is no reason why any one sector must spend an amount exactly equal to its income. One sector can run a surplus (spend less than its income) so long as another runs a deficit (spends more than its income).

Historically the US private sector spends less than its income—that is it runs a surplus. Another way of saying that is that the private sector saves. In the past, on average the private sector spent about 97 cents for every dollar of income.

Historically, the US on average ran a balanced current account—our imports were just about equal to our exports. (As discussed below, that has changed in recent years, so that today the US runs a huge current account deficit.)

Now, if the foreign sector is balanced and the private sector runs a surplus, this means by identity that the government sector runs a deficit. And, in fact, historically the government sector taken as a whole averaged a deficit: it spent about $1.03 for every dollar of national income.

Note that that budget deficit exactly offsets the private sector’s surplus—which was about 3 cents of every dollar of income. In fact, if we have a balanced foreign sector, there is no way for the private sector as a whole to save unless the government runs a deficit. Without a government deficit, there would be no private saving. Sure, one individual can spend less than her income, but another would have to spend more than his income.

While it is commonly believed that continual budget deficits will bankrupt the nation, in reality, those budget deficits are the only way that our private sector can save and accumulate net financial wealth.

Scott Fullwiler (via email):

2010q4 Sector Financial Balances by Scott Fullwiler

2010q4 Sector Financial Balances by Scott Fullwiler
click to enlarge

L. Randall Wray: The Perfect Fiscal Storm: Causes, Consequences, Solutions

During the Clinton years as the government budget moved to surplus, it was the private sector’s deficit that was the mirror image to the budget surplus plus the current account deficit. This mirror image is what the Wall Street Journal had failed to recognize—and what almost no one except MMT-ers and the Levy Economic Institute’s researchers understand. After the financial collapse, the domestic private sector moved sharply to a large surplus (which is what it normally does in recession), the current account deficit fell (as consumers bought fewer imports), and the budget deficit grew mostly because tax revenue collapsed as domestic sales and employment fell.

Unfortunately, just as policymakers learned the wrong lessons from the Clinton administration budget surpluses—thinking that the federal budget surpluses were great while they actually were just the flip side to the private sector’s deficit spending—they are now learning the wrong lessons from this crash. They’ve managed to convince themselves that it is all caused by government sector profligacy.

The Politics:

James K. Galbraith: Why Progressives Shouldn’t Fall For the Deficit Reduction Trap

The fetish of long-term deficit reduction is politically poisonous — and economically pointless. In reality, we need big budget deficits. We need them now — and down the road.

… once you concede that deficits are actually bad, you’re boxed in. If you exclude Social Security and Medicare, there is no way to cut deficits seriously (short- or long-term, on unchanged economic assumptions) except by slashing the Pentagon or by raising taxes. If you had to do something, I agree, those would be better moves. But good luck. It’s not a political battle one can win.

In reality, we need big budget deficits. We need them now. We need bigger deficits than we’ve got, to stabilize state and local governments and to provide jobs and payroll tax relief. And we may need them for a long time, on an increasing scale, and in the service of a sustained investment strategy aimed at solving our jobs, energy, environment and climate change problems. To pretend that expansionary policies are needed only for now, gives all this away.

The public deficit is just the obverse of net private savings. That is, when private credit is booming, investment exceeds saving and deficits tend to disappear. That’s what happened in the 1990s. When credit collapses, deficits return. That’s what’s happening now. Large long-term deficits will occur, or not, depending only on whether we succeed in generating a new growth cycle, financed by the expansion of private credit. Policies to cut spending or raise taxes — now or for that matter in the future — contribute nothing to this goal.

Financial reform and debt relief are therefore the only paths to public deficit reduction.; It would be nice to have them, for the economy works better and people are happier when they can borrow and invest privately. But if we don’t get them, the alternative isn’t a "return to fiscal responsibility." It’s a choice between large public budget deficits that fund important and useful activities and tax relief, or large deficits because the recession, housing slump and high unemployment drag on and on, all made worse by cuts in Social Security, Medicare and other public spending.

Yes, we must defend Social Security and Medicare from Wall Street and its political agents — which now, sadly, include the Obama White House. But we’ll lose on that — and everything else — if we start by giving up the fight for an aggressive, effective, sustained and long-range economic recovery program, deficits and all.

The Banksters and You:

James K. Galbraith: In Defense of Deficits

To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.

All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters–led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous “bipartisan” enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget–have labored mightily to confuse the issues.

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“In all life one should comfort the afflicted, but verily, also, one should afflict the comfortable, and especially when they are comfortably, contentedly, even happily wrong.”

John Kenneth Galbraith

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Further Reading:

Bill Mitchell, Stephanie Kelton, Warren Mosler, Marshall Auerback, L. Randall Wray, Pavlina Tcherneva: Fiscal Sustainability Teach-In and Counter-Conference

Lynn Parramore and new deal 2.0: The Deficit: Nine Myths We Can’t Afford

Warren Mosler:
Seven Deadly Frauds of Economic Policy

William Mitchell:
Barnaby, better to walk before we run
Stock-flow consistent macro models
Deficit spending 101 – Part 1
Deficit spending 101 – Part 2
Deficit spending 101 – Part 3

L. Randall Wray:
Understanding Modern Money: The Key to Full Employment and Price Stability

James K. Galbraith:
The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too

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Notes::

1. The extended quotes are used with the kind permission of the authors, James K. Galbraith and L. Randall Wray. The graph is used with the kind permission of Scott Fullwiler.

2. x-posted to fdl and daily kos

    24 Responses to “USG deficits: The Economics, the Politics, the Banksters and You.”

  1. 1 selise-reader said:

    This quote of JG that you posted in the comments at your FDL cross-posting is, I think, the most important matter, and why his judgment is better than many mere economists:

    “We face four pressing priorities: to create jobs, to change how we produce and use energy, to restructure our financial sector, and to curtail the pernicious power of a small number of wealthy persons – our new American oligarchs – who have taken undue advantage of past tax reforms.”

    I would say that he left out two additional pressing priorities: to restructure how we pay for medical services and to shrink to caretaker status the size of the military and spy agencies.

    As far as the deficit is concerned, I agree with JG when he says that it is a “fake problem”*

    EK: What are the policy implications of this view?

    JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we’d be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too.

    *Interview

    replyReply to this comment
  2. 2 selise said:

    @selise-reader: most mere economists make no sense to me. galbraith does (although i think he tries to speak and write on multiple levels and i expect i only get the most superficial ones at best) and his judgement reflects values i can support.

    thanks for including that JG link here. and thanks for reading!

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  3. 3 Texan99 said:

    I saw your note, thanks!

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  4. 4 selise said:

    @Texan99: fabulous, thanks!

    here is my attempt to answer your last question…. but first my disclaimer, i’m just a student of this material too. asking questions helps me think things through… wasn’t trying to impose that on you, but my thanks for going along.

    re the mosler’s business card and the umkc buckaroo examples (reference links here, here and here), you wrote:

    What is the analogous situation to no (dollar) taxation in Mosler’s example of business cards as currency and in the example of buckaroos as currency? Let me start with the buckaroo part, and see if I understand that first. I guess, if the government didn’t impose a tax, the students wouldn’t have to pay the tax with buckaroos. If they didn’t have to accumulate buckaroos for this purpose, then they wouldn’t do their “service-learning” hours unless they thought there was another good reason to do them, independent of the government’s demand. They presumably would spend their hours studying, working at part-time jobs for pay, or doing volunteer work for the community in order to get personal satisfaction or improve their training or their resumes. The tax in this thought-experiement would then represent the government’s demand that the students do work for which they would not receive any compensation of the ordinary kind (wages), which in the non-buckaroo world would enable them to buy stuff like books and housing and food. That might mean that the “buckaroo” tasks the government wanted to get done didn’t get done.

    i think what you wrote is very clear and well thought out! (and probably much better than my understanding the first time i read about it).

    here are some comments:

    1. the buckaroo currency has a floating exchange rate with dollars so that at any given time buckaroos can be exchanged for dollars (at what ever the current exchange rate is). wages paid in buckaroos are still wages and can even be thought of as dollar wages (given the current exchange rate)… so, from the stand point of students, and depending on how the buckaroo system is run and therefore the exchange rate, there may not be that much difference between wages for buckaroos and wages for dollars. wages in buckaroos still permit a student to exchange them for dollars and then to use the dollars to purchase books, etc.

    so i disagree a bit with this part:

    The tax in this thought-experiement would then represent the government’s demand that the students do work for which they would not receive any compensation of the ordinary kind (wages), which in the non-buckaroo world would enable them to buy stuff like books and housing and food.

    the students still can buy stuff via their buckaroo wages (by exchanging them for dollars), but you’ve got the main part right in that the tax allows the school to “purchase” student labor for community service.

    here is mosler (my bold):

    … it was a small open economy. All kinds of currencies are traded there. It doesn’t predominate. But it works and it continues to function for what it was originally intended function which was provisioning the community with student labor — to move labor from the private sector to the public sector. And of course to teach National Income accounting and how a currency works to the students.

    2. re what if there were no buckaroo taxes imposed on the students, you wrote, “That might mean that the “buckaroo” tasks the government wanted to get done didn’t get done”

    i think this is exactly right. and there is one more v important thing… without a buckaroo tax, the buckaroos themselves would be virtually worthless as reflected by the exchange rate.

    that is the key insight of how taxes give value, and create demand for, the currency (buckaroo or dollar).

    in the absence of taxes, the currency looses its value. (this is the case for non-convertible, floating exchange rate like the dollar is now — it’s very different in other systems, for example when the dollar was based on fixed gold convertibility).

    …..

    in conclusion: no taxation is a recipe for hyper-inflation and currency collapse.

    replyReply to this comment
  5. 5 Texan99 said:

    Hey, I posted a long reply, but it doesn’t seem to have shown up, sorry.

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  6. 6 selise said:

    @Texan99: i just checked the spam filter and didn’t see it there. :(

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  7. 7 Texan99 said:

    I’ll just have to write it again! I probably didn’t click the right button after convincing the spam filter that I really was a biological unit. This should have the benefit of my having had a chance to express my point more efficiently:

    You’re saying that the buckaroos are exchangeable for dollars, at a floating rate. OK, then students who work for buckaroos at the government-approved service center can either use their buckaroos for taxes, or they can exchange them for dollars and buy books. If the government issues more buckaroos than it charges in taxes, students will have buckaroos left over, which they will exchange for dollars to buy books with. If the government issues fewer buckaroos than it charges in taxes, the students will have to take a second part-time job at the local hamburger joint to get dollars they can exchange for buckaroos to pay the balance of their tax bill with. They’ll have to cut back on books, or cut back on studying and take a second job.

    If the government charges no taxes at all, the students will have lots of buckaroos to buy books with, but you’re saying that eventually the buckaroo will be devalued in relation to the dollar. If the government cuts the tax burden in half, buckaroos will be somewhat devalued but not entirely, in which case many students will start to quit their jobs at the service center and start flipping burgers, so they can turn their dollars into buckaroos at a favorable rate and extinguish their tax burden at half the expense in work hours. If the government eliminates the tax burden altogether, presumably the exchange rate for buckaroos will start to take on a Zimbabwean aspect. At that point, the service centers will have a hard time getting any students to work there, because they’ll all start flipping burgers instead, and buy lots of books. Basically, the buckaroos will drop out of the economy altogether, leaving only the dollars originating from the private sector.

    From a strictly economical point of view, there’s no problem with this. The dollar will still be fine. What will be missing is the good works the government hoped to achieve by funding the service centers with buckaroo dollars. As you said, the purpose of the exercise was to commandeer student efforts for the public sector; when you remove the tax, the commandeering has no force. But the economy, and the dollar currency system, remains fine.

    All of which is another way of saying that the purpose of the tax is not to prop up the currency but to force the private sector to fund activities that the free market can’t, won’t, or mustn’t perform. (Can’t, because they need to be centralized to work well, as in the case of emergency epidemic control. Won’t, because the people who actually have any resources won’t voluntarily buy them with their own money, as in the case of Chevy Volts. Mustn’t, because the government asserts a monopoly control over various activities, as in the issuance of passports.)

    Also, I still can’t understand why there’s a huge difference between a deficit that results primarily from overspending and one that results primarily from undertaxing. Why does it matter if the deficit is 100 because it’s 1,000 minus 900 or whether it’s 100 because it’s 101 minus 1?

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  8. 8 selise said:

    @Texan99: thanks for retyping! i’m strapped for time right now, but will reply as soon as i can….

    replyReply to this comment
  9. 9 Texan99 said:

    No problem: have a happy Easter weekend.

    replyReply to this comment
  10. 10 Texan99 said:

    You can email me at [ email removed -s ] if you want to take up this thread again sometime.

    replyReply to this comment
  11. 11 selise said:

    @Texan99: thanks! and my apologies for the delay. will try to email you soon. and will now edit out your email addy to protect from spam bot harvesting.

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  12. 12 selise said:

    If the government issues…

    i think the micro and macro is getting a little confusing.

    in this example, the buckaroo government only issues — in aggregate — as many buckaroos as needed to pay students for their public service work. but not all students may choose to work, some may wish to exchange their dollars for buckaroos. some students may desire to earn more buckaroos than they need to pay their taxes (plus whatever for saving and loss) and exchange those buckaroos for dollars.

    i think we get to the same place though:

    If the government charges no taxes at all. … Basically, the buckaroos will drop out of the economy altogether, leaving only the dollars originating from the private sector.

    i agree. except that the dollars are not, in this analogy, “the private sector.” they are the “foreign sector.” two different governments (dollar and buckaroo) and open (to each other) economies.

    From a strictly economical point of view, there’s no problem with this. The dollar will still be fine.

    because the dollar government continues to spend and tax in dollars.

    What will be missing is the good works the government hoped to achieve by funding the service centers with buckaroo dollars.

    yes.

    As you said, the purpose of the exercise was to commandeer student efforts for the public sector; when you remove the tax, the commandeering has no force.

    the buckaroo public sector. when you remove the buckaroo tax, the buckaroo government can not procure, ie pay for (it’s not a command economy), public goods.

    But the economy, and the dollar currency system, remains fine.

    the dollar economy and the dollar currency system remain fine because that depends on the dollar government’s (not the buckaroo government’s) spending and taxing.

    All of which is another way of saying that the purpose of the tax is not to prop up the currency but to force the private sector to fund activities that the free market can’t, won’t, or mustn’t perform.

    in this kind of monetary arrangement (non-convertible currency — no govt promises to convert buckaroos to gold, dollars or something else. and floating exchange rates), the tax does both: it gives value to the currency and makes possible a private sector based on buckaroos which won’t exist without the buckaroo government tax.

    Also, I still can’t understand why there’s a huge difference between a deficit that results primarily from overspending and one that results primarily from undertaxing. Why does it matter if the deficit is 100 because it’s 1,000 minus 900 or whether it’s 100 because it’s 101 minus 1?

    over spending and under taxing are political descriptions based on the size gov desired. public education? national military? police? courts? social security? these and much more are political decisions. my personal preference is for our government to procure those public goods. but we are supposed to live in a democracy and that means everyone should get a say.

    the issue i’m trying to address with this post is that we citizens can’t have our say if we’re being systematically misinformed — that’s what the section, “the banksters and you,” is meant to address.

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  13. 13 Texan99 said:

    Me: “Also, I still can’t understand why there’s a huge difference between a deficit that results primarily from overspending and one that results primarily from undertaxing. Why does it matter if the deficit is 100 because it’s 1,000 minus 900 or whether it’s 100 because it’s 101 minus 1?”

    You: “over spending and under taxing are political descriptions based on the size gov desired. public education? national military? police? courts? social security? these and much more are political decisions. my personal preference is for our government to procure those public goods. but we are supposed to live in a democracy and that means everyone should get a say.”

    Yes, that’s my point. The purpose of the tax is to ensure that the “good works” get done that you (all of “you”; the taxpayers) favor. I believe you’re confusing matters by saying that the tax does double duty by both funding the good works and propping up the currency. If a population wants good works done, it will have to find a way to fund them. My preference is for the people who want the good works to fund the good works with their own resources, rather than taxing Peter to scratch Paul’s charitable itch. But we can achieve a rough approximation of that by taxing everyone fairly equally in whatever amount is needed to make up an aggregate pile of resources sufficient to pay for the aggregate pile of good works that a majority of taxpayers vote for. If the tax is paid fairly equally, you won’t have the problem of Paul demanding that Peter pay for Paul’s favorite charities/wars/court systems/fire departments. (So you see, I not only don’t like “progressive” tax schemes, I also don’t think a flat tax goes far enough. I’d prefer a per capita tax, with a waiver for any year that a taxpayer can’t afford it, as long as he agrees not to vote on fiscal matters that year.)

    We worked through the buckaroo system in detail, so that we could see whether we agreed on the impact of lowering and raising taxes. Here’s how I see your response: while your analogy spoke only to how the 100% fiat-currency buckaroo system worked, you’re assuming that the same results would obtain in any “foreign” currency, because they all work the same way. But they don’t. The buckaroo hypothetical was the extreme case of 100% fiat. At most the foreign currencies suffer to a greater or lesser degree from government interference. Unless the government completely controls the economy, there always is a free currency co-existing with the fiat currency.

    And there alway will be, absent a totalitarian government to stamp the free currency out. Currencies predate government attempts to manipulate them. Currencies arise spontaneously from merchant populations. Not that many years ago, people relied less on crown currencies than on bank notes. These IOUs are symbols of a promise to deliver real value tomorrow for goods or services today. To the extent that they are backed up by a general belief that real goods and services will be available tomorrow, they are stable in value. Otherwise, they inflate out of existence. Even today, in our highly managed U.S. economy, the feds wring their hands over the problem that the merchants in effect create their own currency. It’s not something they can stop. When people exchange promises for future delivery, they’re creating currency.

    There’s always some country somewhere on the globe that manages to keep a non-fiat currency going — Swiss francs or the like — and that’s where capital goes when the rest of the currencies play too many fiat games and destroy the public confidence that they depend on for their value.

    Have you been watching what’s going on with Greek treasuries? The rates are in the stratosphere; people no longer believe the promise of the delivery of future value. Gold keeps climbing; people are demanding a currency that’s hard to inflate by fiat (QE, printing money). Commodities like food and oil are shooting up.

    replyReply to this comment
  14. 14 Texan99 said:

    And as always, I’m looking for a way to be more succinct. Your post #4 objected to my original reading of the buckaroo model, on the ground that I’d left out the possibility of a non-buckaroo currency into which the buckaroos were exchangeable. So my original reading was one that would make sense only in a pure buckaroo-type world. I then did the thought experiment again, taking the external currency into account. Your immediate response was to object that all the external currencies were just like buckaroos, too. So I go back to my original analysis, to which you responded in #4 — one in which all currencies are buckaroo-type currencies.

    In other words, I think you’re taking the discussion in circles! Whether you view the whole world of currency as a buckaroo system, or you think there are alternative currencies that operate differently, there still is no way the government’s taxing and spending powers create value in the currency. All they do is finance public works that can’t/won’t/mustn’t be financed via the free market.

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  15. 15 selise said:

    @Texan99:

    The purpose of the tax is to ensure that the “good works” get done that you (all of “you”; the taxpayers) favor.

    that’s not correct. again, taxes have two main functions:

    1) taxes are what give value, and create demand for, the currency.

    2) also, taxes help regulate aggregate demand.

    taxes don’t fund public goods, government spending does.

    this is a really important point. i don’t know how to address the rest of the paragraph because i think it’s based on this misunderstanding.

    btw, two additional points:

    1. i try to refer to the “function” of taxes (iow, what taxes do), not the “purpose” of taxes which suggests to me a political purpose — a purpose that may or may not be related to an accurate understanding of what taxes actually do.

    2. i use “public goods” instead of “good works” because different people have different ideas about what qualifies as “good.” “public goods” has its own problems but at least, i hope, captures something of the concept of the public commons or goods (services, infrastructure, etc) that the public decides (in a democracy) to provide or create via government.

    **********

    We worked through the buckaroo system in detail, so that we could see whether we agreed on the impact of lowering and raising taxes.

    that’s wasn’t my understanding. i’ve been trying to address your two questions:

    … if you imagine an economy in which the government had a strictly limited role, and almost everything was privatized, so there was a very low taxation rate, wouldn’t the private sector generate plenty of its own financial assets, without needing the government to add financial assets by running a deficit? Don’t the private citizens generate lots of financial assets with the increased after-tax income, more than enough to make up for the kind of financial assets that represent a deficit-running government’s spending more than it takes in in taxes?

    and:

    Something else I don’t understand is why, if a government deficit is beneficial, we don’t just let the government spend whatever it likes and take in no taxes at all?

    i’ll copy my response from the previous thread here for clarity (i hope!):

    wouldn’t the private sector generate plenty of its own financial assets

    and financial liabilities. the net financial assets still = 0.

    the problem(s) with this are explained by bill mitchell in the link under further reading, “Barnaby, better to walk before we run”.

    if a government deficit is beneficial, we don’t just let the government spend whatever it likes

    inflation.

    and take in no taxes at all?

    taxes are what give value, and create demand for, the currency (dollars).

    also, taxes help regulate aggregate demand (as do govt deficits).

    did you read the links in my earlier response to umkc’s buckaroo program? i think they address these questions. but if not, i suggest you also read the transcript (or better yet watch the video) for warren mosler’s presentation at at the teach-in (link under further reading).

    ….

    i think these links will address most of your questions, but if you read them and they don’t please ask again.

    i thought (and wrote) that we were attempting to first address the last part of your final question, “and take in no taxes at all?”

    i think you did at one point have that one down (eventual currency collapse)? Your issue of “the impact of lowering and raising taxes” is not at all the same question because it involves the function of taxes in regulating aggregate demand.

    in any event, i’ll try to respond to some of the rest of your comment, although i think you are jumping ahead to draw conclusions based on multiple misunderstandings… including “the impact of lowering and raising taxes.”

    again, i strongly suggest you first attempt to understand that issue (and others) with the simple analogies first (buckaroo, business card).

    **********

    Here’s how I see your response: while your analogy spoke only to how the 100% fiat-currency buckaroo system worked, you’re assuming that the same results would obtain in any “foreign” currency, because they all work the same way.

    no, that’s not my assumption and further, i completely disagree that “the same results would obtain in any “foreign” currency” or that “they all work the same way.” not what i wrote and not what i think.

    Currencies predate government attempts to manipulate them. Currencies arise spontaneously from merchant populations.

    that’s the myth. i don’t know if it’s true, but there is certainly evidence that it is not true (see, for example, randy wray’s book. stephanie kelton has a short version which i think you said you had read?).

    re bank notes. these are part of horizontal system of financial assets and liabilities which net to 0 (see my comment above).

    there are lots of nations with non-fiat currencies. greece is one of them — because it uses euros. greece’s situation with its currency is not analogous to ours in the USA. the better analogy for greece (a member of the EMU using the euro) is texas (a member state of the USA using the dollar). the difference is that while the 50 states are a political union, the EMU is only a currency (not political) union.

    **********

    note: edited to add stephanie kelton reference link.

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  16. 16 selise said:

    @Texan99:

    ooops, crossed posts.

    Your post #4 objected to my original reading of the buckaroo model, on the ground that I’d left out the possibility of a non-buckaroo currency into which the buckaroos were exchangeable.

    my objection was the way you had included a non-buckaroo currency: the dollar. i was responding to your statements about the relationship of the buckaroo to the dollar.

    So my original reading was one that would make sense only in a pure buckaroo-type world. I then did the thought experiment again, taking the external currency into account. Your immediate response was to object that all the external currencies were just like buckaroos, too.

    where i did write that all external currencies were just like buckaroos??? i don’t think that, and i’m pretty sure i never wrote it.

    So I go back to my original analysis, to which you responded in #4 — one in which all currencies are buckaroo-type currencies.

    you’ve totally lost me.

    would you please quote me? i think you misunderstand (or i was not clear) and i have no idea what statements you are referring to.

    In other words, I think you’re taking the discussion in circles! Whether you view the whole world of currency as a buckaroo system, or you think there are alternative currencies that operate differently, there still is no way the government’s taxing and spending powers create value in the currency. All they do is finance public works that can’t/won’t/mustn’t be financed via the free market.

    that contradicts your statement (which i agreed with) :

    If the government eliminates the tax burden altogether, presumably the exchange rate for buckaroos will start to take on a Zimbabwean aspect. At that point, the service centers will have a hard time getting any students to work there, because they’ll all start flipping burgers instead, and buy lots of books. Basically, the buckaroos will drop out of the economy altogether, leaving only the dollars originating from the private sector.

    no buckaroo tax means “the buckaroos will drop out of the economy altogether.”

    buckaroos have value because they are needed to extinguish tax liabilities.

    my only objection was that dollars do not originate from the private sector. in the buckaroo system, they originate from the foreign sector (in relation to the buckaroo domestic sector).

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  17. 17 Texan99 said:

    “i think you did at one point have that one down (eventual currency collapse)”

    The only currency that collapses when taxes are eliminated is one that’s defined entirely in terms of taxes, i.e., the thought-experiment buckaroos.

    I can say again that non-fiat currencies don’t behave that way, but you don’t believe that non-fiat currencies exist. I don’t know how to respond to that notion except to describe a reality that I experience every day. People do things today in exchange for a promise of something tomorrow; when you symbolize the cross-promises, you’ve got money. Whether a government decides to achieve some functions collectively, and therefore taxes its citizen to perform those functions, has got nothing to do with the citizens’ persistent habit of exchanging promises, which is a currency. A government’s only role in this currency is make the promises more believable among strangers (and therefore easier to use in a large economy) by imposing penalties on people who break their promises. (Yes, I understand that you firmly believe that the government has a different role; I’m describing my position here rather than yours.) (I also know that you apply the label of “horizontal” to these privately exchanged promises, but I don’t understand how you think that label changes anything important.)

    “buckaroos have value because they are needed to extinguish tax liabilities.” Yes, and if you remove the tax liabilities, they have no more value. And you won’t get the things you would have been able to trade the buckaroos for, so you’ve have to figure out another way to fund the public works. If you can’t fund them, and they don’t happen, you may or may not find that society suffers from their absence. But either way, none of that will stop people from trading goods and services with each other, including paying with promises that are transferable to others (i.e., negotiable currency).

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  18. 18 selise said:

    @Texan99:

    The only currency that collapses when taxes are eliminated is one that’s defined entirely in terms of taxes, i.e., the thought-experiment buckaroos.

    the buckaroo is a simple example to help explain the concept. if you think this concept doesn’t apply to the dollar, why not?

    I can say again that non-fiat currencies don’t behave that way, but you don’t believe that non-fiat currencies exist.

    nonsense, i wrote the following: “there are lots of nations with non-fiat currencies.” are you even reading my comments? if not, this is a waste of time for both of us.

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  19. 19 Texan99 said:

    I shouldn’t have used the term “non-fiat currencies.” We don’t interpret the phrase in the same way, and it just confused my exposition or caused me either to misinterpret or misrepresent what you were trying to say.

    I will try to answer your question: “the buckaroo is a simple example to help explain the concept. if you think this concept doesn’t apply to the dollar, why not?” — Why don’t I think the buckaroo model accurately reflects a currency like the U.S. dollar? Because the buckaroo government issues only as many buckaroos as are needed to finance projects that only the buckaroo government is pushing. There is no provision for the goods and services that all the citizens are trading each other promises for, without waiting for the government to tell them whether they should be considering all that stuff to be valuable. In your thought experiment, it is not the buckaroos that perform the latter task, but the external non-buckaroos, which you call “dollars.” (To avoid confusing them with the real-world U.S. currency, let’s call them “platypuses.”) It’s platypuses that people use to pay students to flip burgers with, and that students use to buy books with. When the buckaroos self-destruct, the platypuses are still there to do the free-market work of keeping track of promises in the private sector.

    If you change the thought experiment so that the platypuses are like buckaroos (i.e, the only platypuses in circulation are ones that the government issues to buy public works with), then the free market will come up with crocodiles, and when both the buckaroos and platypuses self-destruct, the crocodiles will still be there. You can’t stop people from creating their own currency in the form of promises to deal with the goods and services they value and want to trade.

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  20. 20 selise said:

    ok. i’ll try one more time….

    Because the buckaroo government issues only as many buckaroos as are needed to finance projects that only the buckaroo government is pushing

    as i wrote @13:

    ..the buckaroo government only issues — in aggregate — as many buckaroos as needed to pay students for their public service work.

    how is that conceptually different than the the USA fed gov spending? the USA fed gov spends dollars into existence.

    To avoid confusing them with the real-world U.S. currency, let’s call them “platypuses.”

    they are real dollars. the buckaroos are not just a thought experiment — if you’ve read the links you know that the buckaroo system is a real program at UMKC and that it operates as a small open economy with a floating exchange rate.

    You can’t stop people from creating their own currency in the form of promises to deal with the goods and services they value and want to trade.

    are you saying that USA dollars are not a government currency? if so, how do you come to that conclusion?

    or are you thinking of of people creating their own currency in some way that is not through a government, or a quasi-government authority like UMKC? if so, can you give some examples?

    replyReply to this comment
  21. 21 Texan99 said:

    “..the buckaroo government only issues — in aggregate — as many buckaroos as needed to pay students for their public service work.” — Yes. The buckaroo government does not issue sufficient buckaroos to cover the rest of the economy — all those things that people are doing that are in addition to the public service work, like flipping burgers and publishing books.

    “how is that conceptually different than the the USA fed gov spending? the USA fed gov spends dollars into existence.” – Whether or not the USA fed gov “spends dollars into existence” (a point on which we needn’t agree for these purposes), it does not create dollars for the sole purpose of funding public works projects. The US also issues sufficient legal tender to deal with the entire economy, including free-market projects that are not encompassed in “government spending.” Things like flipping burgers and publishing books.

    “the buckaroos are not just a thought experiment — if you’ve read the links you know that the buckaroo system is a real program at UMKC and that it operates as a small open economy with a floating exchange rate.” What I was distinguishing from “real US dollars” was not buckaroos but the “dollars” you posited as an external currency at UMKC.

    “are you saying that USA dollars are not a government currency?” No, I’m saying that the monetary system involves more than greenbacks. It includes all kinds of private promises: IOUs of all sorts, including stocks, bonds, and promissory notes, which have value only to the extent that people believe the promises inherent in them.

    “or are you thinking of of people creating their own currency in some way that is not through a government, or a quasi-government authority like UMKC? if so, can you give some examples?” — Negotiable debentures, promissory notes that can be endorsed to new payees, IOUs, the black market, checks drawn on bank accounts, money market funds, accounting book entries, and financial contracts and hedge agreements of all sorts. The parties to such agreements may, but need not, tie them all back to US dollars. Historically, examples of people using their own non-governmental currency included bank notes that traded like money but was backed up only by the credit of the bank or merchant on whom the funds were drawn. If the bank failed, the note was worthless. If a traveler went somewhere so remote that the locals weren’t familiar with the bank, the notes weren’t useful. There can even be personal notes. In a close-knit gambling community, for instance, the IOU of one gambler can be endorsed and traded, just like money, as long as the recipient believes that the original gambler will cough up something of value (money, gold, jewelry).

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  22. 22 selise said:

    @Texan99:

    re your first two paragraphs. please go back to my first reply to you. it’s the part that begins:

    it will help to distinguish between the gov and private roles in money creation. here is an excellent summary …

    re your third paragraph:

    What I was distinguishing from “real US dollars” was not buckaroos but the “dollars” you posited as an external currency at UMKC.

    i did NOT posit dollars as an external currency to the UMKC buckaroo system because dollars — real US dollars – DO function as an external currency to the UMKC buckaroo system

    re your fourth and fifth paragraphs:

    I’m saying that the monetary system involves more than greenbacks.

    Negotiable debentures, promissory notes that can be endorsed to new payees, IOUs, the black market, checks drawn on bank accounts…

    what monetary system? it depends on how you define “monetary system” (why not, for example, include foreign currencies as well?).

    we’re discussing the US monetary system and dollar based financial assets (and liabilities). that is the subject of my post (explicitly stated in the randy wray quote from “Teaching the Fallacy of Composition: The Federal Budget Deficit”) and also your initial question:

    Can you point me toward something to read that would help me understand the argument that there is a necessary inverse relationship between the private savings rate and the government deficit?

    i’m sorry, but i just don’t have it in me to keep referring you to the post or the links (which i think you claimed to have read?). i know this material is paradigm shifting and that can make it hard to understand — it just contradicts too many unexamined assumptions.

    but understanding is a necessary prerequisite to critiquing. my parting advice is that if you really want to attempt to understand, you’re going to attempt to understand it on its own terms. redefining fundamental concepts (fiat money, monetary system, etc) based on your prior assumptions i don’t think will get you there. maybe re-reading warren mosler’s short book (it’s the third link under “further reading”) will help….

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  23. 23 Texan99 said:

    “Understanding is a necessary prerequisite to critiquing” only when the major critique is that something doesn’t make any sense. Well, we gave it a try. I thought I should find out whether you could explain yourself before I made up my mind about the theory you were pushing.

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  24. 24 Texan99 said:

    Only when it’s “not,” I meant to say.

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