Greenspan: Deficits are OK

[Ned]

Greenspan has changed his mind on deficits and is no longer an champion of the istanteous balanced budget. (Now where have you heard this before?)

March 16, 2004
Greenspan Shifts View on Deficits
By EDMUND L. ANDREWS


ASHINGTON, March 15 — Consumer debt is hitting record levels. The federal budget deficit is yawning ever larger. The trade gap? Don't even ask.

Many mainstream economists are worried about these trends, but Alan Greenspan, arguably the most powerful and influential economist in the land, is not as concerned.

In speeches and testimony, Mr. Greenspan, chairman of the Federal Reserve Board, is piecing together a theory about debt that departs from traditional views and even from fears he has himself expressed in the past.

In the 1990's, Mr. Greenspan implored President Bill Clinton to lower the budget deficit and tacitly condoned tax increases in doing so. Today, with the deficit heading toward a record of $500 billion, he warns more emphatically about the risks of raising taxes than about shortfalls over the next few years.

On Monday, the nonpartisan Congressional Budget Office published new calculations showing that the budget deficit now stems almost entirely from tax cuts and spending increases rather than from lingering effects of the economic slowdown.

Mr. Greenspan's thesis, which is not accepted by all traditional economists, is that increases in personal wealth and the growing sophistication of financial markets have allowed Americans — individually and as a nation — to borrow much more today than might have seemed manageable 20 years ago.

This view is good news for President Bush's re-election prospects. It increases the likelihood that the Federal Reserve will keep short-term interest rates low. And it could defuse Democratic criticism that the White House has added greatly to the nation's record indebtedness.

Adjusted for inflation, the average family's debt, including a mortgage, has climbed from $54,000 in 1990 to $79,000 last year. Mortgage foreclosures, credit card delinquencies and personal bankruptcies are all at near record levels.

Mr. Greenspan's view is that household balance sheets are "in good shape," and perhaps stronger than ever, because the value of people's homes and stock portfolios have risen faster than their debts.

The Fed chairman is equally sanguine about the nation's overall borrowing from foreigners, which has soared to more than $500 billion a year and has contributed to a sharp drop in the value of the dollar. And he has also made it clear he will not try to torpedo the president's tax-cutting agenda, which could add another $2 trillion to federal borrowing over the next decade.

"History suggests that the odds are favorable that current imbalances will be defused with little disruption," he declared in a speech two weeks ago.

http://www.nytimes.com/2004/03/16/b...print&position=

[Sava]

Greenspan is a partisan hack

CLinton runs deficits = bash Clinton

Bush runs deficits (much worse BTW) = "deficits okay"



Greenspan should be removed.

[Ned]

Sava, to some extent I agree with you about Greenspan. I think he is singly responsible for the economic collapse we experienced in 2000-1. He was the one arguing all that time (the 1990s) for a balanced-budget and at the same time for tight money. He got his wish and the economy crashed. Anyone could have predicted it. The fact that Greenspan did not says something about Greenspan's understanding of economics.

He has finally come around to an understanding that budget deficits are not necessarily bad even if he hasn't gone so far yet to agree that they are good thing. As I have said before in other threads, the only person that seems to understand that that deficits are good is Dick Cheney, who cites the long economic expansion of the Reagan years as being caused by the large sustained deficits during that era.

[chequita guevara]

The current deficits are not good, however. We have a huge expenditure approaching, during a period when there are going to be fewer productive people. We should be paying down the deficit as much as we can right now, before the Boomers retire. Soon we won't have any option but to cut benefits instead (which is the Republican plan).

[Ned]

Originally posted by chegitz guevara
The current deficits are not good, however. We have a huge expenditure approaching, during a period when there are going to be fewer productive people. We should be paying down the deficit as much as we can right now, before the Boomers retire. Soon we won't have any option but to cut benefits instead (which is the Republican plan).

Nader says ignore Greenspan on this one too. He says that SS is in good shape.

[Sava]

As I have said before in other threads, the only person that seems to understand that that deficits are good is Dick Cheney, who cites the long economic expansion of the Reagan years as being caused by the large sustained deficits during that era.

deficits aren't "good"... it's just that the deficit-driven inflation scare, that Greenspan scolded Clinton on, is a myth.

link: http://www.epinet.org/content.cfm/we...er_conf_speech

This is from the Economic Policy Institude (pretty much the biggest collection of economic geniuses).

The Reagan years were terrible, Ned. The 12 years of Repuke presidency added $4 TRILLION in debt. That's a ticking time bomb... and now the next Bush has added almost $2 TRILLION in a quarter of the time.

Short-term deficit spending to spur the economy (that's SPENDING, not tax cuts) is what is good. This Republican "destroy the federal government" brand of economics is going to cause the downfall of our federal government.

[mrmitchell]

deficits are good

Until you have to pay them back.

[Ned]

Sava, good article. It seems to agree with me that balanced budgets and surpluses are not necessarily good things and that to elevate them to the status of national policy was to make the Democrats into Eisenhower Republicans.

Indeed, an overwhelming focus on balanced budgets is the earmark of Eisenhowerism and is a false doctrine. Eisenhower brought us stagnation and recession. Kennedy and Reagan, who cut taxes, brought us proserity. Clinton "benefitted" from the large deficits inherented from Reagan-Bush. But he then tried to balance the budget like Eisenhower - with the exact same results -- a major recession.

[Sava]

Kennedy's tax cuts which brought prosperity WERE COMPLETELY DIFFERENT from the protectionist GIVEAWAYS to the rich and WEALTH REDISTRIBUTION that Reagan committed.

Balanced budgets WILL NOT bring a major recession... You are waayyyyyy off track Ned.

[mrmitchell]

Clinton "benefitted" from the large deficits inherented from Reagan-Bush. But he then tried to balance the budget like Eisenhower - with the exact same results -- a major recession.

God forbid that Clinton EVER have actually been right for once!

[MrBaggins]

Deficits aren't monolithic things that are "paid back" per se...

They are countless T-Bills, T-Notes and T-Bonds that come to fruition, with intially set interest.

The fact that there are so many in the pipe at any one time means that there is liquidity in the system. Where the government is losing money, it just prints the money it needs, raising the money multiplier, and slightly raising inflation.

The problem comes when the incentive to buy Treasury issued credit dries... which there is evidence of, as we speak.

The less buyers, the more pressure to make them more attractive... which requires raising their interest yield, which will have later inflationary effects.

The system can, at a point generate diminishing returns, with each inflationary trigger knocking on more need for more capital by the government, at a later date. A viscious cycle. This ultimately devalues each dollar in the system.

Therefore the problem with deficits, is that they are an inflationary influence, given certain situations.

[Ned]

Originally posted by Sava
Kennedy's tax cuts which brought prosperity WERE COMPLETELY DIFFERENT from the protectionist GIVEAWAYS to the rich and WEALTH REDISTRIBUTION that Reagan committed.

Balanced budgets WILL NOT bring a major recession... You are waayyyyyy off track Ned.

What? You got to be kidding.

[Sava]

Originally posted by Ned


What? You got to be kidding.

Kidding about what?

The 80's were not a prosperous time for America (maybe for the top 1% it was).

Wage stagnation... the poor and working class wages grew less than the rate of inflation (inflation due to Reagan's deficits).

Concentration of welath... because of Reagan's (and Greenspan's) push towards REGRESSIVE taxation, Wealth was REDISTRIBUTED in a "reverse Robin hood" manner. The poor were taxed and the rich received GIVEAWAY in tax cuts and subsidies.

Massive unemployment... just like Bush's America... Reagan's America was full of unemployment... the rates (which are already high) are artificially lower because discouraged workers were not counted.

Ned... How can you not come to the same conclusions as I do when confronted with these FACTS!?

Believe or not... I think you are smart and capable enough to think logically using reason and empirical evidence.

[Ned]

Sava, the Kennedy tax cuts cut the top rates far more than Bush's tax cuts. In terms of total reductions in taxes, Kennedy's were the largest of the three (Kennedy, Reagan, Bush) in post WWII, IIRC.

When Johnson got into power, he again brought back the "balanced budget" thinking and immediately begain trying to raise taxes to balance the bduget. He was successful and his tax increase caused a recession.

[Sava]

Originally posted by Ned
Sava, the Kennedy tax cuts cut the top rates far more than Bush's tax cuts. In terms of total reductions in taxes, Kennedy's were the largest of the three (Kennedy, Reagan, Bush) in post WWII, IIRC.

When Johnson got into power, he again brought back the "balanced budget" think and immediately begain trying to raise taxes to balance the bduget. He was successful and his tax increase caused a recession.

Kennedy cut rates from 90 something to 60 something... OF COURSE THE CUTS WERE LARGER!!

but they were the right thing to do because the economic conditions called for them... NOTHING suggests... NOT ONE PIECE OF EVIDENCE... suggests Bush's or Reagan's tax cuts were called for. AND THEY HAVEN'T DONE DIDLEYSHIT!

here Ned... from the Economic Policy Institute: http://www.epinet.org/content.cfm/issuebriefs_ib157

it explains what I am talking about...

[Sava]

Here's another great piece about the flawed ideology of tax cuts: http://www.epinet.org/content.cfm/we...america_future

mind you... my conclusions aren't based upon my intellect... we all know I'm a moron. I base my opinions on what other people (much much smarter than myself) say.

[Ned]

Sava, note your change in stance from they were different kinds of tax cuts to whether they were necessary.

Sava, the latent problem in your thinking which is a latent problem in everyone's thinking since Eisenhower is that balanced budgets are "good." The truth is that the almost always lead to recessions while deficits spur growth.

Greenspan now seems to have come on board.

Also, the current tax cuts were necessary to get the economy out of a recession. Monetary policy alone could not work in a deflationary environment.

[Sava]

Originally posted by Ned
Sava, note your change in stance from they were different kinds of tax cuts to whether they were necessary.

Sava, the latent problem in your thinking which is a latent problem in everyone's thinking since Eisenhower is that balanced budgets are "good." The truth is that the almost always lead to recessions while deficits spur growth.

Greenspan now seems to have come on board.

Also, the current tax cuts were necessary to get the economy out of a recession. Monetary policy alone could not work in a deflationary environment.

My position is: in terms of the economy, deficits are inherently neutral, as longer as the government isn't threatened by the debt. This debt and deficit spending is so severe, it will have disastrous consequences.

Your position... well... is just flat out wrong.

[Ned]

Originally posted by Sava
My position is: in terms of the economy, deficits are inherently neutral, as longer as the government isn't threatened by the debt. This debt and deficit spending is so severe, it will have disastrous consequences.

Your position... well... is just flat out wrong.

Of course deficits that are larger than GDP growth are not sustainable. I do not advocate that. However, if you look at the charts and evidence, balanced budgets and surpluses have generally caused rescessions and depressions throughout history.

http://www.levy.org/1/docs/pn/99-3.html

[Sava]

Originally posted by Ned


Of course deficits that are larger than GDP growth are not sustainable. I do not advocate that. However, if you look at the charts and evidence, balanced budgets and surpluses have generally caused rescessions and depressions throughout history.

http://www.levy.org/1/docs/pn/99-3.html

that's a "false cause" argument...

A slowing economy will reduce tax revenues and increase expenses. State and local budgets are often subject to fiscal constraints aimed at balancing budgets, and during economic slowdowns there is increased pressure to raise taxes and cut spending, sometimes under the mandate of state law (Regan 1995).

These kinds of balanced budget requirements and other tax and expenditure limitations reduce economic growth and employment at a time when the nation can ill-afford such losses. A timely, substantial dose of federal aid can offset these effects. Such aid should be commensurate with the size of the state/local sector,

from: http://www.epinet.org/content.cfm/br...pers_117_bp117

balancing a budget has no effect on the economy (in terms of running moderate deficits or moderate surpluses)... it's the things governments will do to balance budgets that affect economic growth.

Because the Bush tax cuts have not affected the economy very much, getting rid of the cuts for the top 1% (as Kerry wants) will NOT hurt economic growth. In addition, the massively irresponsible spending and deficits have the potential to hurt the economy more than tax increases could. Less government spending (the true conservative stance) hurts the economy more than tax increases because we have a Keynesian system.

In this economy... at present... getting rid of the Bush tax cuts in order to save the federal government from gaining even more excessive debt far outweighs any possibly economy benefits that tax cuts could have.

To fix this economy we need:
-targeted consumption based aide for working and lower class families (in the form of tax cuts/credits) a'la Gerald Ford
-extended unemployment benefits to keep consumption stable for the unemployed.
-other consumption increasing measures...

The American economy is around 66%-75% consumption based... supply-side tax cuts only affect between 25%-33% of the economy... and in the current marketplace, companies aren't creating jobs with their excess cash. So the Bush cuts aren't having any benefits, but they are increasing the likelihood that severe negative consequences will occur.

[chequita guevara]

Ned, I remember the summer of 2000 quite well. Fear of inflation due to the internet economy and 4% unemployment caused Greenspan to tighten up the money supply. He raised interest rates, which coincided with lots of IT workers losing their jobs. I don't know what that has to do with deficit reduction.

At that time, Greenspan was saying that a little bit of surplus was good, but not too much. That was his justification for supporting the Bush tax plan. Now we have massie deficits and he likes them, because it furthers the Repug agenda of bankrupting the government, "starving the beast" as they say.

[Lawrence of Arabia]

greenspan is full of ****.

[MrBaggins]

Originally posted by chegitz guevara
Ned, I remember the summer of 2000 quite well. Fear of inflation due to the internet economy and 4% unemployment caused Greenspan to tighten up the money supply. He raised interest rates, which coincided with lots of IT workers losing their jobs. I don't know what that has to do with deficit reduction.

At that time, Greenspan was saying that a little bit of surplus was good, but not too much. That was his justification for supporting the Bush tax plan. Now we have massie deficits and he likes them, because it furthers the Repug agenda of bankrupting the government, "starving the beast" as they say.

Inflation grows the deficit, which grows inflation... as I mentioned.

The problem is, that the deficit is "a beast that must be fed". You have to attract new investors to buy treasury issues, and have to pay them back, more than they invested. The trouble is... that government spends this money on the military and so on, not investing and growing it... so it just has to print new money, when it come time to pay out on the investment.

Deficits are inflationary. The bigger the deficit the bigger the problem. If all the money was eventually recycled... there'd be no issue, of course... but as has been mentioned... some is leaked internationally, and also the wealthy typically trap wealth.

Deficits are not infinitely sustainable without inflationary effect... and unmanaged inflation (especially debt inflation- the least useful kind) is bad.

How large a deficit the economy can sustain is in question. It seems to be able to sustain $7T, but can it sustain $10T, which is where it seems headed by the end of the decade?

[Imran Siddiqui]

The problem comes when the incentive to buy Treasury issued credit dries... which there is evidence of, as we speak.

The less buyers, the more pressure to make them more attractive... which requires raising their interest yield, which will have later inflationary effects.

The system can, at a point generate diminishing returns, with each inflationary trigger knocking on more need for more capital by the government, at a later date. A viscious cycle. This ultimately devalues each dollar in the system.

Therefore the problem with deficits, is that they are an inflationary influence, given certain situations.

Indeed, MrBaggins. Deficits lead to greater inflation by their very nature. The larger the deficit, the more the inflation (to make the bonds more attractive when the debt is already so high). At some point the inflationary effects will have to be dealt with. It may have to be through monetary policy putting on the brakes (think early 80s and Volker) or fiscal policy in raising taxes significantly to not only balance the budget, but pay off debt.

Best to head it off before it gets TOO bad and we are stuck with a massive recession in front of our faces.

[Vanguard]

Now we have massie deficits and he likes them, because it furthers the Repug agenda of bankrupting the government, "starving the beast" as they say.

I don't know if this is their agenda. You obviously can't "starve a beast" by force-feeding it until it grows. This is really more of an excuse for their credulous constituants than it is a goal.

What the Republican elite is really doing is far, far worse. They are doing nothing less than looting the Treasury. They are using deficits to drive the economy faster, which gives them their cronies in the private sector higher profits on which they don't have to pay proportionately higher taxes. So basically it is free money for them.

Until, of course, we run out of borrowing capability and have to raise taxes. At which point the clever ones will avoid the taxes using their knowledge of the tax code they just wrote or they will renounce their citizenships and live in beautiful Antigua, leaving the enormous debt to be paid off by the chumps.

This same strategy has been pursued successfully by so many private sector CEOs over the past 20 years that it is no wonder that the Republicans are copying it. They kept saying they wanted to run the government like a business. We should have believed them

[Velociryx]

I don't get to come around much any more right now, on account of my recent firsthand experience with Republican style "job creation" (which is to say, thanks to this marvellous Bush-driven boom time we're all enjoying, I lost my job and it took quite some time to get another. Working now, but nowhere close to the wage I was making before, but that too, is improving.

That's got nothing to do with the topic at hand of course, but ON that subject, I gotta say that Mr. Baggins has it nailed.

Nope...deficits are not inherently bad things, and in fact, some short term deficit spending is a good thing and can be a real shot in the arm for an ailing economy.

Too much of anything, however, and it'll bite you in the butt, and I think that's the point that Ned and other "Deficits are Good" proponents are missing.

It would be entirely possible, if we maintained our current spending levels, to simply grow our economy out of it's current deficit, but that won't happen, and not because it would be impossible to simply maintain our current spending levels (it would be, but none of our politicians lack the political will to stand for it). Nope, what'll happen is what we've already seen. Drunks with credit cards who seem to think that there's no upper limit to how much debt we can safely and sanely carry....and they'll run up the debt until we're in full on crisis mode, and then....know who gets to pay the bill?

Yep....you and me. Joe worker, who will see taxes spike through the roof till we get the problem marginally under control, and then we'll cut taxes and start the party all over again.

Fun, huh?

-=Vel=-

[Kidicious]

Originally posted by Ned
Mr. Greenspan's thesis, which is not accepted by all traditional economists, is that increases in personal wealth and the growing sophistication of financial markets have allowed Americans — individually and as a nation — to borrow much more today than might have seemed manageable 20 years ago.

Interesting. I must think about this for awhile.

[Vanguard]

the growing sophistication of financial markets

Is he refering to the same sophisticated financial markets that were financing "irrational exuberance" a few years ago?

[Ned]

Vel, I would never suggest that we should run sustained deficits that are greater than the rate of growth of GDP. If we keep them less than that, the amount of debt relative to GDP shrinks over time.

The deficits are not inflationary so long as the economy has excess capacity. They drive the econonmy to full employment and higher utilization rates. When we are at full employment, the increased tax revenue from a maxed out economy should reduce the deficit substantially.

What I am suggesting, though, is that we keep some deficit at all times in order to keep the economy at full employment. If that causes some inflation, so be it. But we know that slaming the brakes on by going into a surplus or by jacking up the interest rates - or both at the same time as was done in 2000 -- can and normally does trigger a recession.

The key thing to remember is that deficits stimulate the economy by adding to demand and surpluses brake the economy by subtracting from it. The issue of which is best at a particular point in time cannot be decided without taking the state of the economy into account. For example, trying to balance the budget or running a surplus during a recession as did Hoover can trigger a depression.

[Lawrence of Arabia]

no, the depression was caused by banks failing and the central bank failing to increase the money supply.