Greenspan: Deficits are OK

[Velociryx]

The problem tho, Ned, is that you're not comparing apples to apples.

Deficits can be bad, even if they grow at rates less than GDP....depends on what the money we borrow is used for. Yes, if it's used for things that actively stimulate demand, you're quite right....if it's used to fund a variety of entitlement programs of dubious value....no. That gets us nowhere but deeper in the hole.

Further, deficits are absolute and predictable in their nature. The government issues exactly X number of T-Bills and Bonds at a given time, and they find buyers for them all.

On the other hand, the rate of GDP growth is a *projection*. Maybe it's right on the money, maybe it's low.

If it's lower than anticipated, and we've already increased the nation's debt load by a known quantity X, then we just shot ourselves in the foot.

The good thing is, our economy is so monsterously strong, we can afford to guess wrong and not have it be fatal, but that debt's still on the books, and multiple wrong guesses over time can have a cumulative effect that noses our debt/GDP value higher.

Further, there's the question of how many US debt instruments the rest of the world is willing to buy up. As has been mentioned, there's a threshold out there, at which point increasing interest rates on the instruments will be the only way to continue financing the circus....which leads to ever-increasing amounts of money needing to be spent on debt-maintenance, which in turn, begins to have exactly the opposite effect as was hoped.

Further still, there's the very real issue that economic growth *could be* financed by corporate bond issuance, and this would speak directly to growth of GDP (whereas not all government financed debt has that effect), except that those don't get as much play, because the US Government is the world's single largest player in that market, and so, squeezes out much of the competiton in that market.

-=Vel=-

[Vanguard]

Entitlement programs actively stimulate demand.

[Velociryx]

Entitlement programs actively stimulate demand.......for more entitlements?

The problem is that the dollars spent on many (not all, but many) of those programs are like funneling dollars into a big black hole from which few, if any, emerge to be recycled through the economy.

There are lots and lots of fat cats who capture that wealth and squirrel it away, creating their own private little empires.

Some entitlements *do* stimulate demand, yes....demand which could be stimulated in more market-driven ways.

-=Vel=-

[Vanguard]

Well, I guess it depends on how you finance the programs and who benefits. And what your exact definition of "demand" is.

But basically taking money from the rich and giving it to the poor increases sales of mass market goods.

Which is pretty much what we mean when we say "entitlement programs" and "demand".

Note however that I won't go so far as to say increasing demand is a desirable goal. Sometimes it is, sometimes it isn't.

EDIT: Yeah, okay. My previous post was pointless. Forget I said anything.

[Velociryx]

Oh, you're right....there are some entitlements that fit this description, and there are hordes and tons that don't.

The Kumquat Grant, for example. Farmers can get...I think it's....$200,000 for growing Kumquats. What *is* that, exactly? I've never seen one in the grocery store, to my knowledge. It's not exactly a big ticket item, so why the push to have them grown? What do we DO with all these Kumquats we're paying for, anyway? Sure, the folks that get this grant money spend a chunk of it, and those dollars go back into the economy as the recipients demand more sports cars, SUV's and the like, but I'm sorry to say that there are better uses for that money, and far better ways to stimulate demand than that.

And the same basic truth holds for many, MANY entitlement programs that the government has running. It's an amusing read, actually, to skim through and see what sorts of oddball programs the government sells debt instruments en masse to fund. Things that work against the very principles that debt-financing is supposed to engineer, and it is these things (as well as military increases, which don't do nearly as much for the economy as say, investment in infrastructure and direct corporate investment) that will eventually make the position untentable.

-=Vel=-

[Velociryx]

Ahhh, I almost forgot! There are also a whole host of farming programs that pay farmers NOT to grow their cash crop! This stimulates demand for finished goods and services, sure, by putting money in the hands of those who will surely spend a chunk of it on...whatever it is they spend it on....and it also takes perfectly usable land OUT of circulation, decreasing the supply of certain goods (milk and tobacco spring immediately to mind here as being reverse subsidy programs I've read about recently) that could be used for viable agricultural pursuits....but of course, the government makes it more lucrative to just....sit there with a hand out.

Again....there are other, better ways of expanding demand (and thereby increasing production and supply) than this....made even worse by the fact that these programs are financed by debt instruments to begin with!

-=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.

I've decided not to agree with Greenspan. I do however agree that increased wealth has allowed consumers to take on more debt. That doesn't transfer to the federal govt.

The funding for the deficit comes from people's income, not their wealth. People's wealth is not just sitting around waiting for the govt to borrow money. It's already invested. There's the possibility that investors will prefer govt bonds more and then reallocate some wealth into govt bonds, but that's not Greenspan's theory.

[Imran Siddiqui]

For example, trying to balance the budget or running a surplus during a recession as did Hoover can trigger a depression.

This is the strangest rationale for the Great Depression I've ever seen! FDR was criticizing Hoover for running a deficit and spending too much on programs during the campaign (how quickly he reversed himself). And, it is generally accepted that adopting a tight money supply during the recession was what really took us over the edge, that and the trade wars.

Further, there's the question of how many US debt instruments the rest of the world is willing to buy up. As has been mentioned, there's a threshold out there, at which point increasing interest rates on the instruments will be the only way to continue financing the circus

And that's the BIG point! Threshold is bound to come soon, especially now that there are economies which are growing exponentially which could be just as good for investment. When will the world decide the US just isn't worth the investment based on our debt load?

[Drake Tungsten]

Ned 1 - Imran 0

[Kidicious]

Hoover did try to keep the budget balanced. He clearly should have done the opposite.

[Colon™]

Originally posted by Kidicious
Hoover did try to keep the budget balanced. He clearly should have done the opposite.

IIRC Roosevelt also kept balanced budgets. The difference was that the size of federal budget grew, not the deficit.

[Ned]

Originally posted by Lawrence of Arabia
no, the depression was caused by banks failing and the central bank failing to increase the money supply.

Lawrence, again when the money supply is collapsing, the Federal Gov't. had to go into major deficit spending to head it off. Hoover did the opposite.

When FDR got into office, he did begin spending and the economy recovered somewhat.

[Imran Siddiqui]

Hoover did try to keep the budget balanced.

But failed in it... he did run a deficit. A lot of it from the new programs he introduced.

When FDR got into office, he did begin spending and the economy recovered somewhat.

And as Colon said, FDR attempted to keep balanced budgets until WW2. Remember he dramatically increased income taxes.

[Imran Siddiqui]

Some interesting other points of view:

http://news.bbc.co.uk/2/hi/business/3430565.stm

Benjamin Friedman, professor of economics at Harvard University, says that "what is at stake in all this is America's economic growth".

He argues that large budget deficits take a substantial proportion of America's savings, preventing it being put to more productive use in the private sector who should be buying new equipment, developing new technologies, and retraining the workforce.

And he points to the Reagan years of high budget deficits, when net investment fell to historic lows and the standard of living and real wages of the typical American family stagnated.

Mr Rubin, who is now chairman of Citigroup, argues that the adverse consequences of running large budget deficits may "be far larger and occur more suddenly than traditional analysis suggests".

In a paper for the Brookings Institution, he argues that "substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad".

This could lead to a run on the dollar (which is already suffering serious weakness), and a sharp rise in the interest rates demanded on Federal debt, which in turn could hurt the stock market, weaken banks and reduce private sector spending.

The Bush administration is doing its best to ward off such an eventuality by constantly telling the financial markets that it is committed to reducing the deficit, and arguing that it is "manageable" as a proportion of the economy.

[Tingkai]

Originally posted by Drake Tungsten
Ned 1 - Imran 0

Russian judge

[Drake Tungsten]

I have an agreement with the French.

[Ned]

Well, at least most of us now seem to agree that deficits stimulate the economy and are "good" when the economy is underperforming, when there is excess capacity and when there is underemployment. The worry about the market for treasuries depends on the real interest rate -- interest rate - inflation rate. Since inflation now is near zero, real interest rates for treasuries is pretty good even thoung they are nominally small.

So long as the economy has a lot of slack in it and we have significant underemployment, inflation should stay low and we can and should stimulate the economy. This is not the time for tax increases as such tax increases will only choke off fiscal stimulus, which may actually send us back into a recession.

[Tingkai]

Originally posted by Ned
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.

Government surpluses trigger recessions? That certainly is a new one. Care to explain?

Originally posted by Ned
surpluses brake the economy by subtracting from it.

Highly unlikely. If a government uses a surplus to pay back debts then money is returned to the lenders who can then invest it elsewhere.

If a government has no debt then it will lend out the money so that it can earn interest, or it will cut taxes, rather than just sitting on it and doing nothing. Look at Singapore and Hong Kong during the 1990s.

[Ned]

Imran, agreed about FDR. I don't think he or anyone understood the benefit of deficit spending. When deficit spending took off during WWII, the economy launched like a rocket and we have never looked back.

[Imran Siddiqui]

at least most of us now seem to agree that deficits stimulate the economy and are "good" when the economy is underperforming

I haven't seen anyone argue this, have you?

This is not the time for tax increases as such tax increases will only choke off fiscal stimulus, which may actually send us back into a recession.

Supply side tax increases (ie, for the top 1-5% of wage earners) is not going to choke off much at all, especially since we are in a recovery. Look at the Clinton tax increases of 1993 if you want some recent history of tax increases causing calamity.

The problem is when are you going to pay the piper. You keep saying we don't have to, but that is dead wrong. One day it is going to lead to a great restructuring of the economy when investor confidence is shot by the huge deficit and instead of a semi-painful recession, we'll have a full blow depression.

[Imran Siddiqui]

Government surpluses trigger recessions? That certainly is a new one. Care to explain?

Oh lord, you don't want to know. Even though he's been shot down on this many, many, many time, he still thinks he's right on this and believes he's 'beaten' those who say otherwise.

[Kidicious]

Originally posted by Imran Siddiqui

Quote:

Hoover did try to keep the budget balanced.

But failed in it... he did run a deficit. A lot of it from the new programs he introduced.

It was a very small deficit, mostly structural. His programs were very low stimulus.

Originally posted by Imran Siddiqui

Quote:

When FDR got into office, he did begin spending and the economy recovered somewhat.

And as Colon said, FDR attempted to keep balanced budgets until WW2. Remember he dramatically increased income taxes.

The economy was recovering when FDR raised taxes. Then it double dipped.

[Tingkai]

Originally posted by Ned
Well, at least most of us now seem to agree that deficits stimulate the economy and are "good" when the economy is underperforming, when there is excess capacity and when there is underemployment.

Most economist, even Keynesians, would disagree.

The 1970s showed the danger of trying to spend your way out of any recession. It simply added to higher inflation without created economic grow, hence the name stagflation.

Governments should radically increase spending only when lower interest have clearly failed to spur economic growth. This is the situation that Keynes was describing in his general theory.

Of course, government spending will naturally increase during a recession due to higher welfare and unemployment payments, but this is different from new forms of spending.

The problem with the Bush approach is that he intervened in the market before lower interest rates had a chance to work.

[Imran Siddiqui]

The economy was recovering when FDR raised taxes

Indeed, but he was conscious of balancing budgets. The point is that the recovering economy didn't immediately lead to another recession. It was fiscal policy (or playing around with fiscal policy) which did that. The recession was caused by some government programs being taken away... many because they were struck down by the SCOTUS, until they reversed course.

[Imran Siddiqui]

The 1970s showed the danger of trying to spend your way out of any recession. It simply added to higher inflation without created economic grow, hence the name stagflation.

The oil shocks also had something to do with stagflation and the lack of economic growth in the 70s. Usually a tax cut or government spending increase (leading to deficit spending) will lead to higher growth, but with great costs.

Monetary policy has much less costs and should be used first, I agree.

[Kidicious]

Originally posted by Tingkai


Most economist, even Keynesians, would disagree.

The 1970s showed the danger of trying to spend your way out of any recession. It simply added to higher inflation without created economic grow, hence the name stagflation.

Huh? Keynesians blame stagflation on the oil shocks.

Originally posted by Tingkai

Governments should radically increase spending only when lower interest have clearly failed to spur economic growth. This is the situation that Keynes was describing in his general theory.

No. I believe that Keynes decribed situations where monetary policy would not work. He did not say that monetary policy was superior to fiscal policy.

[Kidicious]

Originally posted by Imran Siddiqui

Quote:

The economy was recovering when FDR raised taxes

Indeed, but he was conscious of balancing budgets. The point is that the recovering economy didn't immediately lead to another recession. It was fiscal policy (or playing around with fiscal policy) which did that. The recession was caused by some government programs being taken away... many because they were struck down by the SCOTUS, until they reversed course.

But the Depression ended due to fiscal policy, and many believe that the SS tax and efforts to balance the budget prevented earlier recovery.

[Tingkai]

Originally posted by Kidicious
Huh? Keynesians blame stagflation on the oil shocks.

Yes, oil price shocks were definitely the primary cause, but government spending only increased the stagflation effects.

Originally posted by Kidicious
No. I believe that Keynes decribed situations where monetary policy would not work. He did not say that monetary policy was superior to fiscal policy.

I did not mean to imply that he said monetary policy was superior to fiscal policy. My take on Keynes was that he was not an ideologue. He would apply one or the other, or a combination, depending on the situation.

[Kidicious]

Originally posted by Tingkai

Yes, oil price shocks were definitely the primary cause, but government spending only increased the stagflation effects.

Oh, sorry.

Originally posted by Tingkai
I did not mean to imply that he said monetary policy was superior to fiscal policy. My take on Keynes was that he was not an ideologue. He would apply one or the other, or a combination, depending on the situation.

True, he wasn't an ideologue, but for example he didn't even predict stagflation. He thought fiscal policy would always stimulate the economy, or at least he never mentioned when it wouldn't.

[Mr. Harley]

I find I'm agreeing with Imran here, for multiple reasons. However, rather than rehash what's already been stated, let me add an additional negative to our huge deficits - United States trade, and to a certain extent other foreign policies, are hostage to foreign governments.

Both Japan and China have somewherer around 100 billion each in US treasuries. If they sold these, they could essentially create a run on the dollar. Therefor the US cannot afford to force them to respect intellectual property rights (China), or free trade (both countries intervening to keep the dollar stronger).

Now admittedly, this means that US consumers get goods cheaper than they should, as the Japanese and Chinese intervention in the foreign currency markets keeps the dollar higher. However, this also costs the US jobs (anybody read the news recently) and that has become an even bigger issue.

Add in to this the fact that the supply-side/Laffer types missed something I've mentioned once before. We are in a GLOBAL economy. The export of white collar jobs, now that India is getting a goodly portion of it's legal system straightened out, is exactly what the Laffer curve predicts. Exporting jobs to India increases the return on the dollar, more than investing in the US economy, and is being seen as almost as safe.

I would further suggest a 1% surcharge, increasing 1% per month, as a penalty for any country that runs a trade surplus with the United States. If you look at the structural impediments the EU, Japan, and China put up to US goods, you would realize that this is the only way to deal with that issue. You might even be able to keep WTO, though I doubt it, by raising certain provisions about national interests. Plus we could pull out, it's not doing American workers any good. I would rather pay more for US produced goods and give my neighbor a job than continue to engage in not-so-free trade (Japanese and Chinese monetary intervention, European government supported high tech/manufacturing including Eurocopter and Airbus) that is gutting US jobs.