The trade deficit is an unsustainable imbalance that takes away jobs and output.
Facts:
Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.
By now you might suspect that, once again, the mainstream has it all backwards, including the trade issue. To get on track with the trade issue, always remember this:
In economics, it’s better to receive than to give.
Therefore:
Imports are real benefits.
Exports are real costs.
In other words, going to work to produce real goods and services to export to someone else to consume does you no economic good at all, unless you get to import and consume the real goods and services others produce in return.
And also remember:
The real wealth of a nation is
all it produces and keeps for itself,
plus all it imports,
minus what it must export.
A trade deficit in fact increases our real standard of living. How can it be any other way? And the higher the trade deficit the better.
Yes, the mainstream economists, politicians, and media all have the trade issue completely backwards. Sad but true.
To further make the point, if, for example, General McArthur had proclaimed after WWII that since Japan had lost the war, they would be required to send the US 2 million cars a year and get nothing in return, the result would have been a major international uproar about US exploitation of conquered enemies. We would have been accused of fostering a repeat of the aftermath of WWI, where the allies demanded reparations from Germany that were presumably so high and exploitive they caused WWII.
Well, McArthur did not order that, yet for over 60 years, Japan has in fact been sending us about 2 million cars per year, and we have been sending them little or nothing. And, surprisingly, they think this means they are winning the ‘trade war’ and we think it means we are losing it.
Same with China- they think they are winning because they keep our stores full of their products and get nothing in return. And our leaders agree and think we are losing.
This is madness on a grand scheme! Now take a fresh look at the headlines and commentary we see and hear daily:
*The US is suffering from a trade deficit.
*The trade deficit is an unsustainable imbalance.
*The US is losing jobs to China.
*Like a drunken sailor, the US is borrowing from abroad to fund its spending habits, leaving the bill to our children, as we deplete our national savings.
I’ve heard it all. It’s all total nonsense. We are benefiting IMMENSELY from the trade deficit. The rest of the world has been sending us hundreds of billions of dollars worth of real goods and services in excess of what we send them. They get to produce and export, and we get to import and consume.
Is this an unsustainable imbalance? Certainly not for us! Why would we want to end it? As long as they want to send us goods and services without demanding any goods and services in return, why should we not be able to take them?
There is no reason, apart from a complete misunderstanding of our monetary system by our leaders that’s turned a massive real benefit into a nightmare of domestic unemployment.
Recall from the previous innocent frauds, the US can ALWAYS support domestic output and sustain domestic full employment with fiscal policy (tax cuts and/or govt. spending), even when China, or any other nation, decides to send us real goods and services that displace our industries previously doing that work.
All we have to do is keep American spending power high enough to be able to buy BOTH what foreigners want to sell us AND all the goods and services we can produce ourselves at full employment levels. Yes, jobs may be lost in one or more industries. But with the right fiscal policy there will always be sufficient domestic spending power to be able to employ those willing and able to work producing other goods and services for our private and public consumption. In fact, up until recently, unemployment remained relatively low even as our trade deficit went ever higher.
So what about all the noise about the US borrowing from abroad like drunken sailor to fund our spending habits? Also not true! We are not dependent on China to buy our securities or in any way fund our spending.
Here’s what’s really going on:
Domestic credit creation is funding foreign savings.
What does this mean? Let’s look at an example of a typical transaction. Assume you live in the US and decide to buy a car made in China.
You go to a US bank, get accepted for a loan, and spend the funds on the car.
So where do things then stand? You exchanged the borrowed funds for the car, the Chinese car company has a deposit in the bank, and the bank has a loan to you and a deposit belonging to the Chinese car company on their books. First, all parties are ‘happy.’
You would rather have the car than the funds, or you would not have bought it, so you are happy.
The Chinese car company would rather have the funds than the car, or they would not have sold it, so they are happy.
The bank wants loans and deposits, or it wouldn’t have made the loan, so it’s happy.
There is no ‘imbalance.’ Everyone is sitting fat and happy. They all got exactly what they wanted. The bank has a loan and a deposit, so they are happy and in balance. The Chinese car company has the $ US deposit they want as savings, so they are happy and in balance. And you have the car you want and a car payment you agreed to, so you are happy and in balance as well. Everyone is happy with what they have at that point in time.
And domestic credit creation-the bank loan- has funded the Chinese desire to hold a $ US deposit at the bank which we also call savings.
Where’s the ‘foreign capital?’ There isn’t any! The entire notion of the US somehow depending on foreign capital is inapplicable. Instead, it’s the foreigners who are dependent on our domestic credit creation process to fund their desire to save $ US financial assets.
It’s all a case of domestic credit funding foreign savings.
We are not dependent on foreign savings for funding anything.
Nor can we be. Again, it’s our spread sheet and if they want to save our $ they have to play in our sandbox. And what options do foreign savers have for their dollar deposits? They can do nothing, or they buy other financial assets from willing sellers, or they buy real goods and services from willing sellers. And when they do that, at market prices, again, both parties are happy. The buyers get what they want- real goods and services, other financial assets, etc. The sellers get what they want- the dollar deposit. No imbalances are possible. And there is not even the remotest possibility of US dependency on foreign capital, as there’s no foreign capital involved anywhere in this process.
If there is one thing all members of Congress believe is that social security is broken. President elect Obama said the money won’t be there. President Bush used the word bankruptcy four times in one day, and Senator McCain said social security is broken. They are all wrong.
As we’ve already discussed, the government never has or doesn’t have any of its own money. It spends by changing numbers in our bank accounts. This includes social security.
There is no operational constraint on the Government’s ability to meet all Social Security payments in a timely manner.
It doesn’t matter what the numbers are in the Social Security Trust Fund account.
The trust fund is nothing more than record keeping, as are all accounts at the Fed.
When it comes time to make Social Security payments, all the govt has to do is change numbers up in the beneficiary’s accounts, and then change numbers down in the trust fund accounts to keep track of what it did. If the trust fund number goes negative, so be it. That just reflects the numbers that are changed up as payments to beneficiaries are made.
And one of the major discussions in Washington is whether or not to privatize social security. As you might be guessing by now, that entire discussion makes no sense whatsoever, so let me begin with that and then move on.
The idea of privatization is that:
1. Social security taxes and benefits are reduced, and instead,
2. The amount of the tax reduction is used to buy specified shares of stock. And
3. Because the government is going to collect that much less in taxes the budget deficit will be that much higher, and so the government will have to sell that many more Treasury securities to ‘pay for it all’ (as they say).
Got it?
1. They take less each week from your pay check for social security and
2. You get to use the funds they no longer take from you to buy stocks.
3. You later will collect a bit less in social security payments when you retire, but
4. You will own stocks that will hopefully become worth more than the social security payments you gave up.
From the point of view of the individual it looks like an interesting trade off. The stocks you buy only have to go up modestly over time for you to be quite a bit ahead.
Those who favor this plan say yes, it’s a relatively large one time addition to the deficit, but the savings in social security payments down the road for the government pretty much makes up for that, and the payments going into the stock market will help the economy grow and prosper.
Those against the proposal say the stock market is too risky for this type of thing, and point to the large drop in 2008 as an example. And if people lose in the stock market the government will be compelled to increase social security retirement payments to keep them out of poverty. Therefore, unless we want to risk a high percentage of our seniors falling below the poverty line, government is taking all the risk.
They are both terribly mistaken. (Who would have thought?)
The major flaw in this main stream dialogue is what is called a ‘fallacy of composition.’ The typical textbook example of a fallacy of composition is the football game where you can see better if you stand up, and then conclude that everyone would see better if everyone stood up.
Wrong! If everyone stands up no one can see better, and everyone is standing up rather than sitting down. So all are worse off.
They all are looking at what is called the micro level for the individual social security participants rather than looking at the macro level which includes the entire population.
To understand what’s fundamentally wrong at the macro (big picture, top down) level, you first have to understand that participating in social security is functionally the same as buying a government bond. Let me explain.
With the current social security program you give the government your dollars now, and it gives you back dollars later. That is exactly what happens when you buy a government bond (yes, or put your money in a savings account). You give the government your dollars now and you get dollars back later plus any interest.
Yes, one might turn out to be a better investment and give you a higher return, but apart from the rate of return, each is very much the same.
(Now that you know this, you are way ahead of Congress, by the way.)
Steve Moore story
And now you are ready to read about the conversation of several years back I had with Steve Moore, then head of economics at the CATO institute, now a CNBC regular, and a long time supporter of privatizing Social Security.
Steve came down to speak about social security at one of my conferences in Florida. He gave his talk that went much like I just stated- by letting people put their money in the stock market rather than making social security payments they will better off over time when they retire, and the one time increase in the government budget deficit will be both well worth it and probably paid down over time in the expansion to follow, as all that money going into stocks will help the economy grow and prosper.
At that point I led off the question and answer session.
Warren: “Steve, giving the government money now in the form of social security taxes, and getting it back later is functionally the same as buying a government bond, where you give the government money now and it gives it back to you later. The only difference is the return.”
Steve: “OK, but with government bonds you get a higher return than with Social Security which only pays your money back at 2% interest. Social Security is a bad investment for individuals.”
Warren: “OK, I’ll get to the investment aspect later, but let me continue. Under your privatization proposal, the government would reduce Social Security payments and the employees would put that money into the stock market.”
Steve: “Yes, about $100 per month, and only into approved, high quality stocks.”
Warren: “OK, and the US Treasury would have to issue and sell additional securities to cover the reduced revenues.”
Steve: “Yes, and it would also be reducing social security payments down the road.”
Warren: “Right. So to continue with my point, the employees buying the stock buy them from someone else, so all the stocks do is change hands. No new money goes into the economy.”
Steve: “Right”
Warren: “And the people who sold the stock then have the money from the sale which is the money that buys the government bonds.”
Steve: “Yes, you can think of it that way.”
Warren: “So what’s happened is the employees stopped buying into social security, which we agree was functionally the same as buying a government bond, and instead bought stocks. And other people sold their stocks and bought the newly issued government bonds. So looking at it from the macro level, all that happened is some stocks changed hands, and some bonds changed hands. Total stocks outstanding and total bonds outstanding, if you count social security as a bond, remained about the same. And so this should have no influence on the economy, or total savings, or anything else apart from generating transactions costs?”
Steve: “Yes, I suppose you can look at it that way, but I look at it as privatizing, and I believe people can invest their money better than government can.”
Warren: “Ok, but you agree the amount of stocks held by the public hasn’t changed, so with this proposal nothing changes for the economy as a whole.”
Steve: “But it does change things for Social Security participants.”
Warren: “Yes, with exactly the opposite change for others. And none of this has even been discussed by Congress or any mainstream economist? It seems you have an ideological bias towards privatization rhetoric, rather than the substance of the proposal.”
Steve: “I like it because I believe in privatization- I believe that you can invest your money better than government can.”
With that I’ll let Steve have the last word here. The proposal in no way changes the number of shares of stock, or which stocks the American public would hold for investment. So at the macro level it is not the case of allowing the nation to ‘invest better than the government can.’ And Steve knows that, but it doesn’t matter, and he continues to peddle the same illogical story that he knows is illogical. And he gets no criticism from the media apart from the discussion as to whether stocks are a better investment than social security, and whether the bonds the government has to sell will take away savings that could be used for investment, and whether the government risks its solvency by going even deeper into debt, and all the other such innocent fraud nonsense.
Unfortunately, the deadly innocent frauds continuously compound and obscure any chance for legitimate analysis.
And it gets worse yet. The ‘intergenerational’ story continues with something like this:
“The problem is that 30 years from now there will be a lot more retired people and proportionately fewer workers (that part’s right), and the Social Security trust fund will run out of money (as if number in a trust fund is an actual constraint on govt’s ability to spend…silly, but they believe it), so to solve the problem we need to figure out a way to be able to provide seniors with enough money to pay for the goods and services they will need.”
With that last statement it all goes bad. They assume that the real problem of fewer workers and more retirees, which is also known as the dependency ratio, can be ‘solved’ by making sure the retirees have sufficient funds to buy what they need.
Let’s look at it this way. 50 years from now when there is one person left working and 300 million retired people (I exaggerate to make the point), that guy is going to pretty busy since he’ll have to grow all the food, build and maintain all the buildings, do the laundry, take care of all medical needs, produce the TV shows, etc. etc. etc.
So what we need to do is make sure those 300 million retired people have the funds to pay him??? I don’t think so! This problem obviously isn’t about money.
What we need to do is make sure that one guy working is smart enough and productive enough and has enough capital goods and software to be able to get all that done, or those retirees are in serious trouble, no matter how much money they might have.
So the real problem is, if the remaining workers aren’t sufficiently productive there will be a general shortage of goods and services and more ‘money to spend’ will only drive up prices, and not somehow create more goods and services.
The mainstream story deteriorates further as it continues:
“Therefore, government needs to cut spending or increase taxes today, to accumulate the funds for tomorrow’s expenditures.”
By now I trust you know this is ridiculous, and evidence of the deadly innocent frauds hard at work to undermine our well being and the next generation’s standard of living as well.
Our government neither has or doesn’t have dollars. It spends by changing numbers up in our bank accounts, and taxes by changing numbers down in our bank accounts.
And raising taxes serves to lower our spending power. That’s ok if spending is too high causing the economy to ‘overheat’ as we have too much spending power for what’s for sale in that big department store called the economy.
But if that’s not the case, and, in fact, spending is falling far short of what’s needed to buy what’s offered for sale at full employment levels of output, raising taxes and taking away our spending power only makes things that much worse.
And the story gets even worse. Any mainstream economist will agree that there pretty much isn’t anything in the way of real goods we can produce today that will be useful 50 years from now. They go on to say that the only thing we can do for our descendents that far into the future is to do our best to make sure that they have the knowledge and technology to help them meet their future demands.
So the final irony is that in order to somehow ‘save’ public funds for the future, what we do is cut back on expenditures today, which does nothing but set our economy back and cause the growth of output and employment to decline.
And, for the final ‘worse yet,’ the great irony is that the first thing they cut back on is education- the one thing the mainstream agrees should be done that actually helps our children 50 years down the road.
Should our policy makers ever actually get a handle on how the monetary system functions, they would realize the issue is social equity, and possibly inflation, but never government solvency.
They would realize that if they want seniors to have more income at any time, it’s a simple matter of raising benefits, and that the real question is, what level of real resource consumption do we want to provide for our seniors? How much food do we want to allocate to them? How much housing? Clothing? Electricity? Gasoline? Medical services? Those are the real issues, and yes, giving seniors more of those goods and services means less for us. The amount of goods and services we allocate to seniors is the real cost to us, not the actual payments, which are nothing more than numbers in bank accounts.
And if they are concerned about the future, they would support the types of education they thought would be most valuable for that purpose.
But they don’t understand the monetary system and they won’t see it the ‘right way around’ until they do understand it.
Meanwhile, the deadly innocent fraud of Social Security takes its toll on both our present and our future well being.
Several years ago I had a meeting with Senator Tom Daschle and then Asst. Treasury Secretary Lawrence Summers. I had been discussing these innocent frauds with the Senator, and explaining how they were working against the well being of those who voted for him. So he set up this meeting with the Asst. Treasury Secretary, who was also a former Harvard economics professor and had two uncles who had won Nobel prizes in economics, to get his response and hopefully confirm what I was saying.
I opened with a question:
“Larry, what’s wrong with the budget deficit?”
To which he replied:
“It takes away savings that could be used for investment.’
To which I replied:
“No it doesn’t, all Treasury securities do is offset operating factors at the Fed. It has nothing to do with savings and investment”
To which he replied:
“Well, I really don’t understand reserve accounting so I can’t discuss it at that level.”
Senator Daschle was looking at all this in disbelief. The Harvard professor of economics Asst. Treasury Secretary Lawrence Summers didn’t understand reserve accounting? Sad but true. So I spent the next twenty minutes explaining the ‘paradox of thrift’ (more detail on this innocent fraud #6 later) step by step, which he sort of got right when he finally responded
“…so we need more investment which will show up as savings?”
I responded with a friendly ‘yes’ after giving this first year economics lesson to the good Harvard professor and ended the meeting. And the next day I saw him on a podium with the Concord Coalition- a band of deficit terrorists- talking about the grave dangers of the budget deficit.
This third deadly innocent fraud was and is alive and well at the very highest levels.
So here’s how it really works, and it could not be simpler:
Any $US government deficit exactly EQUALS the total net increase in the holdings $US financial assets of the rest of us- businesses and households, residents and non residents- what’s called the ‘non government’ sector.
In other words,
Government deficits = increased ‘monetary savings’ for the rest of us. To the penny.
Most simply- Government deficits ADD to ‘our’ savings, to the penny.
This is accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.
So, for example, if the government deficit was $1 trillion last year, it means the net increase in savings of financial assets for everyone else combined was exactly $1 trillion.
To the penny.
(For those who took some economics courses, you might remember that net savings of financial assets is held as some combination of actual cash, Treasury securities, and member bank deposits at the Federal Reserve.)
This is economics 101, and first year money banking. It is beyond dispute. It’s an accounting identity. Yet it’s misrepresented continuously, and at the highest levels of political authority. They are just plain wrong.
Just ask anyone at the CBO (Congressional Budget Office), as I have, and they will tell you they have to ‘balance the check book’ and make sure the government deficit equals our new savings, or they have to stay late and find their accounting mistake.
As before, it’s just a bunch of spread sheet entries on the government’s own spreadsheet. When the accountants debit (subtract from) the account called ‘government’ when government spends, they also credit (add to) the accounts of whoever gets those funds. When the government account goes down, some other account goes up, by exactly the same amount.
Next is an example of how operationally government deficits add to savings. This also puts to rest a ridiculous new take on this innocent fraud that’s popped up recently:
“Deficit spending means the government borrows from one person and gives it to another, so nothing new is added- it’s just a shift of money from one person to another.”
In other words, they are saying deficits don’t add to our savings, but just shift savings around. This could not be more wrong! So let’s demonstrate how deficits do ADD to savings, and not just shift savings:
1. Start with the government selling $100 billion of Treasury securities.
(Note this sale is voluntary, which means the buyer buys the securities because he wants to. Presumably because he believes he is better off buying them than not buying them. No one is ever forced to buy government securities. They get sold at auction to the highest bidder who is willing to accept the lowest yield.)
2. When the buyers of these securities pay for them, bank accounts at the Fed are reduced by $100 billion to make the payment.
In other words, money in bank accounts at the Fed is exchanged for the new Treasury securities (which are also accounts at the Fed). At this point (non government) savings is unchanged. The buyers now have new Treasury securities as savings, rather than the money that was in their bank accounts before they bought the Treasury securities.
3. Now the Treasury spends $100 billion after the sale of the $100 billion of new Treasury securities.
4. This Treasury spending adds back $100 billion to someone’s bank accounts.
5. The non government sector now has its $100 billion of bank accounts back
AND $100 billion of new Treasury securities.
Bottom line-
The deficit spending of $100 billion directly added $100 billion of savings in the form of new Treasury securities to non government savings (which includes everyone but the government).
The savings of the buyer of the $100 billion of new treasury securities shifted from money in his bank account to his holdings of the Treasury securities.
Then the Treasury spent $100 billion after selling the Treasury securities, and the savings of recipients of those funds saw their bank accounts and savings increase by that amount.
So, to the original point, deficit spending doesn’t just shift financial assets (money and Treasury securities) outside of the government.
Instead, deficit spending directly adds that amount of savings of financial assets to the non govt sector.
And, likewise,
A federal budget surplus directly subtracts exactly that much from our savings.
And the media and politicians and even top economists all have it BACKWARDS!
In July 1999 the front page of the Wall St. Journal had two headlines. Towards the left was a headline praising President Clinton and the record government budget surplus, and explaining how well fiscal policy was working. On the right margin was a headline that said Americans weren’t saving enough and we had to work harder to save more. Then a few pages later there was a graph with one line showing the surplus going up, and another line showing savings going down.
They were nearly identical, but going in opposite directions, and clearly showing the gains in the government surplus roughly equaled the losses in private savings.
There can’t be a budget surplus with private savings increasing (including nonresident savings of $US financial assets). There is no such thing, yet not a single mainstream economist or government official had it right.
Meeting with Al Gore
Early in 2000, in a private home in Boca Raton Florida, I was seated next to then Presidential Candidate Al Gore at a fundraiser/dinner to discuss the economy.
The first thing he asked was how I thought the next president should spend the coming $5.6 trillion surplus forecast for the next 10 years. I explained that there wasn’t going to be a $5.6 trillion surplus, because that would mean a $5.6 trillion drop in non government savings of financial assets, which was a ridiculous proposition. At that time the private sector didn’t even have that much in savings to be taxed away by the government, and the latest surpluses of several hundred billion dollars had already removed more than enough private savings to turn the Clinton boom to the soon to come bust.
I pointed out to Candidate Gore how the last 6 periods of surplus in our 200+ year history had been followed by the only 6 depressions in our history, and how the coming bust due to allowing the budget to go into surplus and drain our savings would result in a recession that would not end until the deficit got high enough to add back our lost income and savings, and deliver the aggregate demand needed to restore output and employment. I suggested the $5.6 trillion surplus forecast for the next decade would more likely be a $5.6 trillion deficit, as normal savings desires are likely to average 5% of GDP over that period of time.
And that’s pretty much what happened. The economy fell apart, and President Bush temporarily reversed it with his then massive deficit spending of 2003, but after that, and before we had enough deficit spending to replace the financial assets lost to the Clinton surplus years (a budget surplus takes away exactly that much savings from the rest of us), we let the deficit get too small again, and after the sub-prime debt driven bubble burst we again fell apart due to a deficit that was and remains far too small for the circumstances.
For the current level of government spending, govt is over taxing us and we don’t have enough after tax income to buy what’s for sale in that big department store called the economy.
Anyway, Al was a good student, and went over all the details, and agreed it made sense and was indeed what might happen, but said he couldn’t ‘go there.’ And I said I understood the political realities, as he got up and gave his talk about how he was going to spend the coming surpluses.
Meeting with Robert Rubin
Maybe 10 years ago, around the turn of the century, just before it all fell apart, I found myself in a private client meeting at Citibank with Robert Rubin and about 20 Citibank clients. Rubin gave his take on the economy, and indicated the low savings rate might turn out to be a problem. With just a few minutes left, I told him I agreed about the low savings rate being an issue, and added:
“Bob, does anyone in Washington realize that the budget surplus takes away savings from the non government sectors?
To which he replied:
“No, the surplus adds to savings. When the govt runs a surplus, it buys Treasury securities in the market, and that adds to savings and investment.
To which I replied:
“No, when you run a surplus we have to sell our securities to get the money to pay our taxes, and our net financial assets and savings go down by the amount of the surplus.”
Rubin: “No, I think you’re wrong.”
I let it go and the meeting was over. My question was answered. If he didn’t understand surpluses removed savings no one in the administration did. And the economy crashed soon afterwards.
When the January 09 savings report was released, and the press noted that the rise in savings to 5% of GDP was the highest since 1995, they failed to note the current budget deficit passed 5% of GDP, which also happens to be the highest it’s been since 1995.
Clearly the mainstream doesn’t yet realize deficits add to savings. And if Al Gore does, he isn’t saying anything. So watch this year as the federal deficit goes up and savings goes up. Again, the only source of ‘net $ US monetary savings’ (financial assets) for the non government sectors combined (both residents and non residents) is US government deficit spending.
And watch how the same people who want us to save more at the same time want to ‘balance the budget’ by taking away our savings, either through spending cuts or tax increases.
They are all talking out of both sides of their mouths.
They are part of the problem, not part of the answer.
And they are at the very highest levels.
Professor Wynne Godley
Except for one. Professor Wynne Godley, retired head of Economics at Cambridge University and now over 80 years old, was widely renounced as the most successful forecaster of the British economy for multiple decades. And he did it all with his ‘sector analysis’ which had at its core the fact that the government deficit equals the savings of financial assets of the other sectors combined. And even the success of his forecasting, the iron clad support from the pure accounting facts, and the weight of his office, all of which continues to this day, he has yet to convince the mainstream of the validity of his understandings.
So now we know deficits aren’t the ‘bad things’ the way the mainstream thinks they are.
The government won’t go broke;
Federal deficits don’t burden our children;
Federal deficits don’t just shift funds from one person to another; and
Federal deficits add to our savings.
Taxes function to regulate our spending power and the economy in general.
If the ‘right’ level of taxation needed to support output and employment happens to be a lot less than government spending, that resulting budget deficit is nothing to be afraid of regarding solvency, sustainability, or doing bad by our children.
The only risk is inflation (to be discussed in detail later in this book).
So what is the role for deficits in regard to policy?
It’s very simple. Whenever spending falls short of sustaining our output and employment; when we don’t have enough spending power to buy what’s for sale in that big department store we call the economy for ANY reason; government can act to see to it our own output is sold by either cutting taxes or increasing govt. spending.
So if everyone wants to work and earn money but doesn’t want to spend it, fine!
Government can either buy the output (hand out contracts for infrastructure repairs, national security, medical research, and the like or spend directly)
and/or keep cutting taxes until we decide to spend and buy our own output. The choices are political. ‘Finance’ and the size of the deficit offers no useful information in making that decision.
The right sized deficit is the one that gets us to where we want to be with regards to output and employment, as well as the size of government we want, no matter how large or how small a deficit that might be.
What matters is real life- output and employment- not the size of the deficit, which is an accounting statistic. In the 1940’s an economist named Abba Lerner called this ‘Functional Finance’ and wrote a book by that name that is still very relevant today.
More on this later, as we now move on to the next innocent fraud.
