Economics

America’s Three Deficits

Feb 2, 2012 Laura Tyson

The US faces painful choices about how to close its long-run fiscal gap, and a credible plan should be decided now and implemented promptly – but only after the economy has recovered. For the next few years, the priorities of fiscal policy should be jobs, investment, and growth.

BERKELEY – This year began with a series of reports providing tantalizing evidence that economic recovery in the United States is strengthening. The pace of job creation has increased, indicators for manufacturing and services have improved, and consumption spending has been stronger than anticipated. But it is too early to celebrate.

Output growth in the US remains anemic, and the economy continues to face three significant deficits: a jobs deficit, an investment deficit, and a long-run fiscal deficit, none of which is likely to be addressed in an election year.

Although output is now higher than it was in the fourth quarter of 2007, it remains far below what could be produced if labor and capacity were fully utilized. That gap – between actual and potential output – is estimated at more than 7% of GDP (more than $1 trillion).

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parthasarathy Shakkottai Feb 25, 2012

Bushido, the warrior code says:
1. Think of what is right and true.
2. Put the science into practice.
3. Become acquainted with the arts.
4. Understand the negative and positive qualities in everything.
5. Learn to see everything accurately.
6. Become aware of what is not obvious.
7. Be careful even in small matters.
8. Don’t do anything useless.
This is about items 4, 5, 6, 7, and 8 for people who dabble in economy like me.

The biggest problem in public analysis is the economic illiteracy of mainstream media, congress, president and neo-liberal economists who confuse the budgets of USA (the currency issuer) with budgets of everybody else (currency users). Scare words like “unsustainable debt”, “living beyond our means”, “debt crisis” etc. are used and comparisons made to household budgets, a totally incorrect analogy. The dollar is basically a token that keeps the economy running.
Modern Monetary Theory is true. Lots of data is conformity with it. Deficits are good, surplus is bad, govt debt implies private sector wealth, national debt need not be paid back, USA does not need taxes to spend, the debt/GDP does not mean anything for a monetarily sovereign nation, China does not fund our economy, inflation is not a risk until full employment is reached, USA can afford to bailout the states and stop all austerity. Almost everything said in the mainstream media is wrong. The congress and the president repeat talking point economics as does Fox News. It is a shame!
Income taxes play a minor role in macroeconomics. There is no urgency in fixing taxation. It is a major distraction to allow any useful action. Immediate deficit funding is what is required. Taxation has a role in income equality and inflation control and can be attended to later because right now the plutocracy is in control. Government creates money and the economy uses it. http://pshakkottai.wordpress.com/2011/11/23/how-the-economy-works-a-diagram/
a) Federal Deficits – Net Imports = Net Private Savings is strictly true.
Government creates money and the economy uses it. http://pshakkottai.wordpress.com/2011/11/23/how-the-economy-works-a-diagram/
a) Federal Deficits – Net Imports = Net Private Savings is strictly true. Govt “debt” is the sum of all deficits and appears on one side of the equation whereas the private sector “debt” means negative savings. Govt deficit is the source of money.
Govt “debt” is the same as private savings. These are in the form of the govt bonds held by citizens, pension funds and so on. If the national debt is paid off lots of citizens will be unhappy. The interest also flows into the private sector. The two key equations in economics which apply to any system of govt are a) and b):
A numerical proof of (a) is shown in figure 4 of http://pragcap.com/resources/understanding-modern-monetary-system
b) Gross Domestic Product = Federal Spending + Private Investment + Private Consumption + Net exports.
The GDP has been approximately 5 times govt spending. Actual data is in
http://pshakkottai.wordpress.com/2011/10/16/
http://www.davemanuel.com/charts2/surpluses_and_deficits_1940-2011.html shows deficits have been quite common (58 deficits out of 70 years)
The household net worth of USA is $58.5 Trillion. The national debt is $14 T. GDP is about the same, $14T/yr. The ratio of GDP/yr to govt spending/yr has been about 5 over the years. The same ratio holds for household net worth to national debt.
The currency issuer is the monopoly producer of money and, just as every asset has a liability, also results in government liabilities. The issuer's liabilities, or "debt", is a digital account of the currency supply used by the currency users. To a fiat currency issuer, the currency supply is a digital accounting tool, not an asset in and of itself. The currency supply is simply the bookkeeping records corresponding to all the currency users’ savings in banknotes, deposits, and treasuries.
Money functions as both a store of value and a medium of exchange. When users acquire dollars they can spend them for items in the marketplace or choose to save them as banknotes, deposits, and treasuries.
The more users choose to save the more "debt" the issuer takes on. A common misconception is that currency issuers "borrow" money. The issuer does not borrow because it is the monopoly producer of the currency - the money that currency users spend or save. This is simply double entry accounting.
Savings by currency users, domestic or foreign, is a straightforward concept on an individual level but becomes counter intuitive on a macro level." from
http://dollarmonopoly.blogspot.com/p/issuer-user-paradigm.html”
Which has nice sketches to explain MMT.
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William Wallace Feb 9, 2012

Spot on. The real question that plagues us, however, is how to make political and economic debate rational again, else ideas such as these will remain stellar, yet unheeded, blog posts.

I fear that until the Citizens United decision is reversed, and media de-oligopolized, we're going to have a hard time of it.
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Paul A. Myers Feb 5, 2012

I would like to see a broad-based progressive policy debate in the United States by economic progressives centered on an immediate $1 trillion public works program as part of a multi-trillion dollar, multi-year investment approach to more research, more investment in educational skills, and progressive employment practices that ensure low-wage jobs carry reasonable health insurance.

Strong arguments should be taken to the American public that taking on public debt to build public assets is the "smart play" to gain future competitive advantages for the American economy, to make sure America comes out the "winner" in the future competition with the new emerging countries.

A clear argument needs to be made that the only way to turn around the decade-long decline in average median wages, and the decline in purchasing power for the majority of American households, is through first massive investments in public infrastructure that impact private sector productivity and then improved skills-based education in the medium term--smarter plumbers, smarter physicists.

A clear argument needs to be made that improving average real wages and family real incomes does not come from tax cuts at the top, that a billionaire-based economy is not a middle class economy.

It is long since past time to take the progressive arguments straight against the economic reactionaries and brand the economic royalists for what they are.

And since the economic royalists are running their poster boy for president this year, what better time to take the good arguments, the sound reasoning to the American public.

And can we stop talking about the debt we're going to leave to our children and start talking about the assets and opportunities that we are going to bequeath to them.
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