The Problem with Budget Surpluses (or even too-small deficits)

[Timsup2nothin]

Oh, I'll grant we have tons of immobile wealth. My hair-splitting is that it's not the same as immobile money. Because we live in such a currency-dominated society, it's money that encourages production. Wealth only sometimes does. (except as an ephemeral 'motivation')

Ah. But doesn't the money have to be in some way backed by wealth to be effective? The initial premise here revolves around the point that a budget surplus is a drag on the economy, and I think that drag is attributable more to the removal of actual wealth into the hands of government than as a shortage of currency.

The issue of the budget surplus dragging the economy, in my opinion, comes from the method that is typically used to create that surplus...that being taxation on production. Taxation on production (ie income tax) creates no compensatory reduction in the accumulation of wealth by others (who are just as interested in getting out of debt as the government, with 'getting out of debt' being yet another aspect of accumulating wealth, just operating in the range of negative numbers). So you have wealth being drawn out of circulation in all directions, which stalls productivity no matter how much currency you throw at it.

I think a tax on accumulation rather than production (ie property tax) could produce a balanced budget or surplus without being a drag on the economy because it would just redistribute the accumulation rather than disincentivise productivity.

Of course people with large accumulations of wealth would prefer to balance the budget by burning me at the stake, and even though there doesn't seem to be any direct connection between burning me at the stake and balancing the budget they are much better represented by the government than I am, so I tend to lay pretty low.

 

[brennan]

The issue of the budget surplus dragging the economy, in my opinion, comes from the method that is typically used to create that surplus...that being taxation on production. Taxation on production (ie income tax) creates no compensatory reduction in the accumulation of wealth by others (who are just as interested in getting out of debt as the government, with 'getting out of debt' being yet another aspect of accumulating wealth, just operating in the range of negative numbers). So you have wealth being drawn out of circulation

Governments spend their tax income. It is passed on to public sector workers and suppliers, encouraging the velocity of money, not making it vanish into thin air.

 

[Timsup2nothin]

Governments spend their tax income. It is passed on to public sector workers and suppliers, encouraging the velocity of money, not making it vanish into thin air.

It is also spent on interest on their national debt, and could be spent on paying down that debt. That isn't 'making it vanish into thin air', and while it may not encourage the velocity of money it would have other benefits for the economy. In my opinion the velocity of money in the US needs very little encouragement from the government since the vast majority spend everything they earn and more, most of them just to get by, so the velocity of money is fairly high.

 

[Hygro]

I think there's a missing component in your analysis. That being the fact that money is always being removed from the economy through wealth accumulation. If the government is removing it they are just one player, admittedly a big player, accumulating wealth. But even a big player isn't always a match for huge swarms of smaller players.

I buy stock. Usually I'm not actually 'financing the company' because the stock has long since been issued, I'm just exchanging money for stock with someone else. I sell and realize a profit. I invest in a building. It's empty, and I do nothing much with it, or I might even live in it which isn't a productive use. I sell it after a while and realize a profit. I loan some money out for interest. I collect payments from a wage earner who is not made any more productive by being in debt, realizing a profit. I'm accumulating wealth, through it all, despite the fact that nothing I am doing is actually productive. Most likely I am also doing something productive and 'making' money as well, but everything I and millions of others are accumulating without producing is being drawn out of the economy just as surely as a government budget surplus is.

The current US economic problem stems from wealth accumulation going strong and pulling money out of the economy while the government borrows to feed the economy to keep it going. This process has been going on for decades and appears to be accelerating. Since the big accumulators have very loud voices in government the use of the economy as a wealth transfer engine from the government to them is unlikely to change.

You are correct, there are "demand leakages" and they require someone fill the gap. The best "someone" is a government that can print money, ideally giving it to the right places (the bottom on up) instead of the wrong places (the top on, well, the top). Other effective demand leakages include things like population growth and imports.

The difference between a budget surplus and unspent private savings is that those savings can be spent, whereas the surplus itself cannot. The state can match the surplus with new spending, which is a separate choice. But you are correct, if money is hoarded, its effectively gone.

Governments spend their tax income. It is passed on to public sector workers and suppliers, encouraging the velocity of money, not making it vanish into thin air.

This is exactly the myth I'm trying to dispel here. Governments spend, and governments tax. Some governments (like Ireland's) are legally constrained from spending much differently than they tax, because governments like Ireland's are not economically sovereign.

But sovereign economic states don't spend their taxes. They just spend and tax as two different things. All spending is new money, even if it is not net new money over the previous year's money supply, and, respectively, all taxes is redeemed (destroyed) IOUs.

 

[Timsup2nothin]

You are correct, there are "demand leakages" and they require someone fill the gap. The best "someone" is a government that can print money, ideally giving it to the right places (the bottom on up) instead of the wrong places (the top on, well, the top). Other effective demand leakages include things like population growth and imports.

The difference between a budget surplus and unspent private savings is that those savings can be spent, whereas the surplus itself cannot. The state can match the surplus with new spending, which is a separate choice. But you are correct, if money is hoarded, its effectively gone.

The unspent private savings can be spent in the future. The surplus establishes increased freedom for the government to spend in the future. I don't see them as distinctly different. If we were talking about the famous 'balanced budget amendment and outlawing deficit spending ever that's different.

I happen to believe in Keynes and think deficit spending is absolutely required at times. The trick is you can't do it all the time, and when it isn't necessary you need to reenforce your ability so you can do it when it is.

I also have come to think that private wealth accumulation needs to be discouraged more than it is, but that's another issue...though related.

 

[Hygro]

The unspent private savings can be spent in the future. The surplus establishes increased freedom for the government to spend in the future. I don't see them as distinctly different. If we were talking about the famous 'balanced budget amendment and outlawing deficit spending ever that's different.

I happen to believe in Keynes and think deficit spending is absolutely required at times. The trick is you can't do it all the time, and when it isn't necessary you need to reenforce your ability so you can do it when it is.

I also have come to think that private wealth accumulation needs to be discouraged more than it is, but that's another issue...though related.

Well that's the whole point, present spending doesn't constrain future spending, which is the fundamental difference between the government and a household. Indeed, your very observation of how hoarding holds back the economy shows us one reason it is necessary the government run a persistent deficit.

 

[Timsup2nothin]

Well that's the whole point, present spending doesn't constrain future spending, which is the fundamental difference between the government and a household. Indeed, your very observation of how hoarding holds back the economy shows us one reason it is necessary the government run a persistent deficit.

Household or government, you can't run a persistent deficit forever though. Eventually servicing the accumulated debt exceeds revenue. That's why I think some discouragement of other leakage needs to be applied. I'd much rather the nation accumulate greater economic flexibility than the rich guy down the road accumulate another summer home.

 

[Antilogic]

I think you are implicitly assuming a constant revenue stream.

 

[El_Machinae]

All spending is new money, even if it is not net new money over the previous year's money supply, and, respectively, all taxes is redeemed (destroyed) IOUs.

No, I don't think that's true. It's not all new money. Some of it is recirculated money. If it was all new money, then 100% of tax revenues would be used to pay off expired/due treasuries. But it isn't. Only a small portion of the budget goes towards paying off treasuries

Household or government, you can't run a persistent deficit forever though.

You can run a persistent deficit forever, but it requires economic growth. Your income needs to rise faster than your payments, is all. This is why a student can get a student loan, get a job, and then lease a car and buy a house, even though the student loan is not paid off.

So, in fact, a deficit that would generate economic growth (supply side) is always a good idea. After that, it's just figuring out what the good investment are, that generate growth greater than the borrowing costs.

 

[Farm Boy]

It seems like it requires a some degree of irrational exuberance. "This works because we stipulate it works." Which is probably why Hygro starts triggering a bit of the "Would you like to talk about Jesus?" vibe when he really gets rolling on this.

 

[Timsup2nothin]

You can run a persistent deficit forever, but it requires economic growth. Your income needs to rise faster than your payments, is all. This is why a student can get a student loan, get a job, and then lease a car and buy a house, even though the student loan is not paid off.

So, in fact, a deficit that would generate economic growth (supply side) is always a good idea. After that, it's just figuring out what the good investment are, that generate growth greater than the borrowing costs.

To run a persistent deficit forever doesn't require economic growth. It requires perpetual economic growth. Care to suggest how to establish that?

Your guy with the student loans turned into loans for toys treadmill of debt...eventually he dies. Nations don't generally look forward to that out.

 

[El_Machinae]

To run a persistent deficit forever doesn't require economic growth. It requires perpetual economic growth. Care to suggest how to establish that?

Oh, it's not easy to establish the plausibility of perpetual growth. Hell, the economics of "what IS growth?!?" are not well understood. In short, it's the ability to iteratively discover new 'stuff' that we prefer to 'old' stuff, such that we'll trade an increasing amount of our 'old' stuff for the 'new' stuff over time.

You need perpetual innovation, and a perpetual shifting of goalposts (of what people want enough to work for) to get perpetual growth.

But, shallowly, it's fairly obvious that you can run perpetual deficits as long as you have perpetual growth. And, to bring it full circle, this means than any deficits that would cause growth end up being potentially good ideas. Deficits that don't cause growth, obviously, can be unsustainable if their burden grows faster than the economy grows

 

[brennan]

To run a persistent deficit forever doesn't require economic growth. It requires perpetual economic growth. Care to suggest how to establish that?

When did anyone mention forever?

So long as we can foresee new innovation, we can foresee increases in productivity. So long as we can see increases in productivity we can sustain persistent deficits. When we can no longer foresee innovation we'll probably have no need for a deficit anyway.

The real question is where is the new innovation coming from and how to put it into action. New advances are now far more expensive than they were in previous centuries, when the steam engine and flight were developed in people's sheds. Is it realistic anymore to expect governments to be able to sit back and let small businesses do all the work - I see very little innovation from small scale business, mostly I see more fast food chains opening up.

 

[Hygro]

Household or government, you can't run a persistent deficit forever though. Eventually servicing the accumulated debt exceeds revenue.

If interest rates are kept below growth debt to GDP does not begin the feedback loop, which is entirely sustainable. My monetary econ professor claimed that causes inflation but he's wrong, because we used to have that for decades, and we've had that the past 6 years, and it hasn't caused inflation. It did allow permanent deficit spending while the post ww2 debt to gdp ratio declined.

But even if interest on the debt was spiraling out of control, the country could still pay for its own debt denominated in its own money that it prints every day.

No, I don't think that's true. It's not all new money. Some of it is recirculated money. If it was all new money, then 100% of tax revenues would be used to pay off expired/due treasuries. But it isn't. Only a small portion of the budget goes towards paying off treasuries



You can run a persistent deficit forever, but it requires economic growth. Your income needs to rise faster than your payments, is all. This is why a student can get a student loan, get a job, and then lease a car and buy a house, even though the student loan is not paid off.

So, in fact, a deficit that would generate economic growth (supply side) is always a good idea. After that, it's just figuring out what the good investment are, that generate growth greater than the borrowing costs.

You can run a persistent deficit forever without economic growth, provided it alleviates demand leakages and population growth. Above that, it's inflationary but wage-driven inflation does not much take away from the economy, it's just annoying.

Spending on the federal level being divorced from taxation just means that while there might not be net new money (check what you cut from my quote) the literal money is new money. Tax revenues aren't used, but they are pseudo used if, during a surplus, we are also transferring treasuries into cash at the same number value of our surplus. I'm not even sure we do that. Nose goes for looking it up.

It seems like it requires a some degree of irrational exuberance. "This works because we stipulate it works." Which is probably why Hygro starts triggering a bit of the "Would you like to talk about Jesus?" vibe when he really gets rolling on this.

It works because it historically worked because that's how the system literally works. Most people aren't comfortable with the steps so they get sold myths to keep them following along. The old myth that was more conservative than the truth but allowed us to make use of this was "deficits are okay as long as they are below growth." The new myth that's ruined everything and is even more disingenuous is "our nation is in debt and we're burdening future generations with payments" (notice how in decades we've never burdened present generations with payments, isn't it amazing how that works?)

 

[Farm Boy]

Problem with confidence men and confidence games is that myths matter. The higher you stack the cards the easier the whole thing comes down.

 

[crabapple]

it is impossible to have economic exponential growth forever, because growth means consumption of more and more energy and other resources, that leads to all kind of environmental problems ( global warming, diversity loss ect) that will remove the environmental services that the earth provide to our economic system, therefore the system will crash.

A better discussion would be discussing how do we make an economic system not growth dependent.

 

[Timsup2nothin]

If interest rates are kept below growth debt to GDP does not begin the feedback loop, which is entirely sustainable. My monetary econ professor claimed that causes inflation but he's wrong, because we used to have that for decades, and we've had that the past 6 years, and it hasn't caused inflation. It did allow permanent deficit spending while the post ww2 debt to gdp ratio declined.

But even if interest on the debt was spiraling out of control, the country could still pay for its own debt denominated in its own money that it prints every day.

Which is the point at which your econ professor becomes correct, because when you start just printing whatever you need to service the debt it is inflationary.

The industrialization process produced tremendous growth rates in GDP, and those tremendous growth rates make a lot of things that look good historically far less practical than they seem. China is finding that out...or will be in a decade or so.

 

[El_Machinae]

Farm boy: the issue is that the system Hygro is describing is literally built up from a barter system, each rung on the ladder would be rather acceptable to any interested person. The issue is that we cannot easily swallow the whole, or especially the last few rungs, without a base understanding of the lower parts of the pyramid. So, in the end, it requires a bit of an illusion. Not because the system is broken, but because the illusion is easier to understand.

You can run a persistent deficit forever without economic growth, provided it alleviates demand leakages and population growth.

Can you spare the time to unpack that? I'm not sure I understand. How is demand leakage dissociated from growth?

Tax revenues aren't used, but they are pseudo used if, during a surplus, we are also transferring treasuries into cash at the same number value of our surplus. I'm not even sure we do that.

How can tax revenues not be being used? There's large portion of the system that would work if we just literally handed paper notes around. You don't need a surplus, even, to do that. I understand that you'll continually be destroying money to pay back the Fed, but that strikes me as being only a tiny portion of the budget.

 

[Farm Boy]

Farm boy: the issue is that the system Hygro is describing is literally built up from a barter system, each rung on the ladder would be rather acceptable to any interested person. The issue is that we cannot easily swallow the whole, or especially the last few rungs, without a base understanding of the lower parts of the pyramid. So, in the end, it requires a bit of an illusion. Not because the system is broken, but because the illusion is easier to understand.

That is rather the point. Dollars have value because we deem them to have value, without that confidence, they're valueless. Now people can track ''this paper is worth this much shiny metal and I've decided to value shiny metal.'' They can track that a specific amount of dollars is worth an hour of their time. But the higher you stack things the harder they get to understand. And ultimately it doesn't matter if the people educated in the dynamics of confidence money have confidence in it or not. The tighter you wind up the leverage on the confidence the more spectacularly it unwinds if you hit a bump that scares Joe Schmo.

 

[Hygro]

Which is the point at which your econ professor becomes correct, because when you start just printing whatever you need to service the debt it is inflationary.

The industrialization process produced tremendous growth rates in GDP, and those tremendous growth rates make a lot of things that look good historically far less practical than they seem. China is finding that out...or will be in a decade or so.

There's a large canyon that needs to be leapt when explaining how printing money to service the debt leads to inflation. Most of the time I ask people to make that leap they go to the echo outcrop and yell loudly, but that's not bridging the sides.

Somehow those interest payments have to convince businesses to raise prices for their to be inflation. And not raise wages for that inflation to be problematic.

Interest rates are a policy variable so we can just continue to set those where we need them. But the bigger danger of printing more and more relative to GDP to service the debt is not runaway inflation but rich people getting richer. That was the problem of the 80s and 2000s: high interest rates relative to the employment, and these large deficits that did help us limp along but were terribly top heavy. But not much inflation.

Farm boy: the issue is that the system Hygro is describing is literally built up from a barter system, each rung on the ladder would be rather acceptable to any interested person. The issue is that we cannot easily swallow the whole, or especially the last few rungs, without a base understanding of the lower parts of the pyramid. So, in the end, it requires a bit of an illusion. Not because the system is broken, but because the illusion is easier to understand.

Bit of a quip but it's not based on a barter system, it's based on a debit-credit system.

Can you spare the time to unpack that? I'm not sure I understand. How is demand leakage dissociated from growth?

I mean, if the economy was completely stagnant, productivity remained the same, GDP per capita was the same, and there was no net new economy, we'd still have people saving old money indefinitely, we'd still have a trade balance, we could still have a growing population, and so on.

How can tax revenues not be being used? There's large portion of the system that would work if we just literally handed paper notes around. You don't need a surplus, even, to do that. I understand that you'll continually be destroying money to pay back the Fed, but that strikes me as being only a tiny portion of the budget.

Those circulating papers are creating by the spending, not by the receiving of the taxes. That we recirculate very roughly same amount of papers that we uncirculate is why it looks and feels like we are using the uncirculated papers.

That is rather the point. Dollars have value because we deem them to have value, without that confidence, they're valueless. Now people can track ''this paper is worth this much shiny metal and I've decided to value shiny metal.'' They can track that a specific amount of dollars is worth an hour of their time. But the higher you stack things the harder they get to understand. And ultimately it doesn't matter if the people educated in the dynamics of confidence money have confidence in it or not. The tighter you wind up the leverage on the confidence the more spectacularly it unwinds if you hit a bump that scares Joe Schmo.

Okay, you have no confidence in the dollar. You take your earning in bitcoin. I'm the IRS and I say, congrats on earning 20 bitcoin this year, I'll be taking 38% of that in dollars.

What are you going to do?