Maybe I misunderstood Keynes

Nekkid Capitalism:

Marshall Auerback: There is No Progressive Case for Deficit Cutting – The Myth of the “Virtuous” Clinton Surpluses

Democrats, like President Obama, persistent invoke the halcyon Clinton budget surpluses as some kind of Holy Grail for the country. But the mythical “virtue” of the Clinton budget surpluses is one of those unfortunate pieces of misinterpreted history that continues to afflict the Democrats in regard to their conduct of fiscal policy. Implicit in this argument is the belief that somehow balanced budgets are the norm, that President Clinton’s responsible stewardship righted the fiscal ship of state, after it has been left close to “insolvent” by the irresponsible legacy of Reagan’s supply-side economic adventurism.

Well, let’s look at the history first: for the past 82 years, the US government’s budget has been in deficit of varying proportions of GDP over 80 per cent of the time. There is nothing insidious or inherently sinister about these deficits. Each time the government tried to push its budget into surplus, a major recession followed which forced the budget via the automatic stabilizers back into deficit, ultimately helping to put a floor on demand and prevent a recurrence of the Great Depression.


During the Clinton years, everybody – Democrats and Republicans alike – applauded these surpluses because it meant that the government’s outstanding debt was being reduced. But Professor Fullwiler’s chart confirms that as the government budget moved to surplus during the latter years of the Clinton Presidency, the private sector’s deficit correspondingly grew larger: It was the mirror image to the budget surplus plus the current account deficit. In other words, this chart illustrates that the budget surplus meant by identity that the private sector was running a deficit.

Why is that? It is because budget surpluses suck income and wealth out of the private sector. As the budget surpluses grew, households and firms were going ever farther into debt, and they were losing their net wealth of government bonds. Even when the government went back into deficit, it was insufficient to offset the cumulative effect of huge private debt accumulation and rising trade deficits, both of which ultimately laid the foundations for the Great Financial Crash of 2008.

I’ll be the first to admit I’m no econonumberologist but my understanding of Keynesian Economics was that in bad times the government should run up deficits (borrow) and in good times pay back those loans. If I’m reading this Auerback fella right then government is supposed to borrow in bad times and never pay it back.

Maybe somebody else can explain it to me.

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28 Responses to Maybe I misunderstood Keynes

  1. WMCB says:

    So….deficits forevah???

    Personally, I think that a lot of people on both sides of the political and/or economic fence have the same fatal flaw in their thinking:

    It’s the idea that their pet policies have zero, or almost zero, downside. Which is untrue. It’s untrue of every decision you will ever make in life. Everything has both a cost and a benefit. Everything. The point of being an adult is to rationally decide how much benefit is worth how much downside.

    The author is correct that socking away that surplus did have a negative side to it. So? Was that negative consequence bigger or smaller than the negative consequence of continuing to amass debt? Did he bother to ask?

    People don’t ask the right questions. Magical thinking abounds, whether it’s the right who believe that the free market will automatically take care of things, or the left who thinks that the govt can give us every single thing we want, with no over-obtrusiveness, and with someone else forever paying for it.

  2. WMCB says:

    Steve Wynn tells the truth about why businesses aren’t hiring. They don’t trust Obama:

    I believe in Las Vegas, I think its best days are ahead of it, but I’m afraid to do anything in the current political environment in the United States. You watch television and see what’s going on on this this debt ceiling issue. And what I consider to be a total lack of leadership from the President, and nothing will get fixed until the President himself steps up and wrangles both parties in Congress. But everybody is so political, so focused on holding their job for the next year, that the discussion in Washington is nauseating.

    And I’m saying it bluntly that this administration is the greatest wet blanket to business and progress and job creation in my lifetime. And I can prove it and I could spend the next three hours giving you examples of all of us in this marketplace that are frightened to death about all the new regulations, our health care costs escalate. Regulations coming from left and right. A President that seems, you know — that keeps using that word redistribution.

    Well, my customers and the companies that provide the vitality for the hospitality and restaurant industry, in the United States of America, they’re frightened of this administration. And it makes you slow down and not invest your money. Everybody complains about how much money is on the side in America. You bet. And until we change the tempo and the conversation from Washington, it’s not going to change.

    And those of us who have business opportunities and the capital to do it, are going to sit in fear of the President. And you know, a lot of people don’t want to say that. They say oh, God, don’t be attacking Obama. Well, this is Obama’s deal. And it’s Obama that’s responsible for this fear in America.

    The guy keeps making speeches about redistribution, and maybe we ought to do something to businesses that don’t invest, they’re holding too much money. You know, we haven’t heard that kind of money except from pure socialists.

    Everybody is afraid of the government. And there’s no need — there’s no need, you know, soft pedaling it. It’s the truth. It is the truth. And that’s true of Democratic businessmen, and Republican businessmen, and I am a Democratic businessman and I support Harry Reid, I support Democrats and Republicans, and I’m telling you that the business community in this country is frightened to death of the weird political philosophy of the President of the United States. And until he’s gone, everybody is going to be sitting on their thumbs.

    Want some jobs? Get rid of the boob.

    • ralphb says:

      Well I’ll be damned, someone finally fucking went and let the cat out of the bag. Bless Steve Wynn, he may need it.

  3. yttik says:

    “..the mythical “virtue” of the Clinton budget surpluses…”

    Well, I really enjoyed the “mythical” virtue of all that peace and prosperity. The low unemployment rates were kind of fun too.

  4. Dario says:

    You have it right Myiq. Balancing the budget in fact is a bad thing, just look at the different states that have to do it. The government should strive to have surpluses and use that cushion during economic downturns. Obviously FDR had no choice but to run a deficit, but the government should have began to payoff the debt after WWII when we had an amazing economy into the 60s, instead the U.S. decided to build an empire.

  5. Dario says:

    I believe in Las Vegas, I think its best days are ahead of it, but I’m afraid to do anything in the current political environment in the United States.

    It’s b.s. Businesses invest when there are customers to serve. It’s that simple. Any uncertainty is tacked to the price. That’s why places that are experiencing war have runaway inflation. The U.S. had price controls during WWII. As investors retreat because of uncertainty, there are supply shortages and prices escalate. One can say that the uncertainty is tacked to the price. We don’t see run away inflation or shortage of supply of anything. We have excess production capacity, excess housing, excess hotel accommodation, excess labor. There’s no reason to invest. Gambling is for most people entertainment and people who are on a tight budget or unemployed are not going to go to Las Vegas to spend their food money.

    That’s why it’s up to the government to invest right now in such things as infrastructure, education, health care, etc. because those investments are not or should not be for profit.

    • ralphb says:

      It would be nice if government would invest in those things, provided they cut wasteful ineffective spending somewhere else to get the money. But they won’t do it.

      • ralphb says:

        oh, but that still wouldn’t bring the economy back nor get the private sector investing again. it would just be nice.

  6. WMCB says:

    *shrug* Your opinion. But I guess I’m more likely to believe business owners small and large, who tell me out of their own mouths why they are not hiring and expanding.

    Your saying “No, that is not why!” rings kind of ridiculous, since you seem to be assuming that they are all either stupid or lying their asses off. I guess you know their minds and process of decision-making better than they do?

    Beautiful theories that rely on ignoring that the world is full of individuals who make economic decisions for their own reasons, not yours, need to remain beautiful theories. They tend to suck outside the classroom.

    • yttik says:

      “..the business community in this country is frightened to death..”

      It’s true, WMCB. Business owners are scared to death of what is going to happen next. Will the US collapse? Will the Gov decide to tax us out of existence? Will we face hyper inflation and the cost of goods will shoot up? We’re not hiring and investing, we’re stocking up on beans and rice and buying gold.

      Obama has done nothing but promote panic and fill people with uncertainty. Just recently he was trying to frighten us all with threats of the Gov not being able to afford to send out SS checks. Before that it was a complete collapse if we don’t bail out the banks, and then a complete collapse if we don’t pass the stimulus.

      • WMCB says:

        Yup. Not to mention the fact that NOTHING he has done so far has had the results he so confidently predicted.

        And no, I don’t want to hear “we should have gone bigger.” With what money? We are already borrowing 40% of our operating costs! The stimulus cost MORE than the total cost of both the Iraq and Afghanistan wars from the beginning til present day. If that’s not enough to “jump start” things, then you’re shit out of luck, and “more” isn’t going to do it.

        And this disaster of an administration wants business to stick their necks out, and taxpayers to open their wallets? Fuck them. I’ll open my wallet when I trust who is doing the spending, and not before.

      • ralphb says:

        I’m in an LLC with a small business or so and we can’t do squat. We don’t know what our costs will be or anything else going forward, not to mention a lack of customers. We used to say we would expand if we had the customers. Now, I doubt if we would even then. It’s just too iffy in every respect and capital is not easy to come by either.

    • WMCB says:

      That was supposed to nest under Dario’s comments about Wynn. Dunno why it didn’t.

  7. Valhalla says:

    What Auerback is saying is that when the government runs a surplus it means the private sector is running a deficit and vice versa. Under normal conditions, the seesaw back and forth is ok, depending on what your policy goals are. If, say, you had real FDR Democrats and not the craptastic faux ones we actually have, we’d be ok running a deficit now because if we were investing in job creation or other New Deal type programs. Plus, the private sector would have a surplus and presumably the combination of factors would lead to hiring, or starting to hire. In any case, more people have money to spend, so they spend it, causing companies to want to hire people so they can fill demand.

    But that’s not what the current deficit is made of, so to speak. Instead, we have a private sector that went into enormous debt during the budget surplus under Clinton and kept on borrowing. Then we had a huge Wall St. Giveaway which is basically being hoarded. Now, instead of investing in infrastructure and so on, the private sector is basically running away with all the money (Auerback):

    To re-emphasize the point which the President should be making day in and day out: It was NOT “profligate” government expenditures that created the current fiscal state of affairs. To the extent that the US has experienced any “government profligacy” over the past 3 years, it is because of our mindless bailout of Wall Street institutions (and note how conspicuously quiet today’s fiscal hawks were during that period when the Treasury and Federal Reserve established trillions of dollars of financial guarantees to fundamentally insolvent banking institutions). The real issue is that those who are better off don’t want to have government intervention in economic affairs unless it benefits them. When the government intervenes with bailouts, Wall Street stands with hat in hand.

    No one wants to bear the actual discipline of markets if that means losses. Those at the high end of income distribution aren’t against deficits when it suits them, but are frequently against it if that might make the workers stronger, or create competition for private businesses (in the case of a public option healthcare reform, for example).

    Here’s the thing: deficits DO matter, but not in the way that is being formulated by President Obama. if a government spends too much after getting us to a state of full employment and higher economic growth, excessive government spending can create inflationary pressures. So to that extent, there is a limit. But acknowledging that unconstrained government spending can create inflation is not the same as arguing that it is in any way operationally constrained. Contrary to conventional “gold standard” thinking, where every dollar spent has to be ‘financed’ by an ounce of gold already in existence, our government can afford anything that it is for sale in its own currency (unless we artificially constrain ourselves via stupid self-imposed limits such as a debt ceiling – the US being the only sovereign issuer of its currency that chooses to constrain itself this way)….

    The whole basis of our growth over the past quarter century has been based on households borrowing and the continuation of negative saving trends. A good place to start recovery efforts, therefore, would be to change this method of economic growth toward restoring incomes and job growth, rather than propping up zombie banks and embracing “rentier economics” through this misconceived emphasis of public debt reduction.

    It has nothing to do with advocating borrowing without paying it back. If conditions were more “normal” or we were investing in job growth, there’s no worry about the deficit until we get to the full employment condition and risk inflation. We’re soooo far from that. We’d be able to anticipate a balancing surplus once more employment kicks in (of course, in that scenario, “normal” is premised on having a Pres. who actually understands the economy, which Obama does not).

    • Valhalla says:

      errgh! again I screwed up my Tags. The first quoted para is mine, not Auerbacks. The rest of the quoted stuff is his.

      I’m going to bed. Obviously I’m too drunk to type.

    • ralphb says:

      That’s a great writeup about traditional Keynesianism. It’s too bad that “government profligacy” in the form of TARP, the additional Fed bailouts, and the phony stimulus (Porkulus) screwed the pooch.

      Now there is danger of worldwide financial contagion because these bills need to be paid and the credit worthiness of nations is doubted. That’s what we have to deal with, no ordinary recession.

      • WMCB says:

        That’s a big part of the problem, ralph. Solutions that would work during a “normal” recession don’t have the same effect when you are up against the debt wall, where “more stimulus” would make the exponential debt interest curve go straight up to kaboom, and interest rates are already at zero and can’t really be dropped anymore. They kicked the can too long.

        Previous decisions by both parties and the Fed left us with very little Keynesian maneuvering room when this thing hit. We are badly boxed in.

        • myiq2xu says:

          Ever since Raygun the GOPers have been repeating a mantra of “tax cuts, tax cuts” as a solution for everything, all the time.

          Bad economy – cut taxes (to stimulate the economy)

          Good economy – cut taxes (because we can afford it)

          That might not be so bad if the GOPers would have insisted on spending cuts to match the tax cuts, but they didn’t. Reagan complained about “tax and spend” liberalism, but he replaced it with “borrow and spend” conservatism.

        • ralphb says:

          Somehow, and I don’t have a clue how, I wound up in a bar in North Dallas once sitting with former Sen John Tower and Lynn Nofziger (i think). They were drunk and talking about Reagan. The West wing crowd would have him all ready to cut some programs and he’d talk to Nancy about it. She would tell him that if he did that it would hurt some group or other, usually poor people. Reagan would come back and tell his advisors to pound sand, find something else to cut. Apparently he didn’t have the heart to hurt people.

    • Three Wickets says:

      ..the US being the only sovereign issuer of its currency that chooses to constrain itself this way.

      This is his main point. Marshall Auerback is another Modern Monetary Theorist…we should be able to print all the money we want and need because we can, fiat currency etc. Bit too fringy for my taste, it’s a progressive meme sold hard by economists to the left of Krugman. They have a different way of thinking about debt, global capital flows, foreign exchange…mainly they ignore them.

      • Lola-at-Large says:

        I’m not buying it either. Money, like reality, either means something or it doesn’t. If it doesn’t, it belongs with everything else that doesn’t mean something: fantasy world.

        Although….I’m beginning to see where Wall Street learned all those neat slight of hand accounting tricks it used that got us into this mess. And I understand entirely the definition of “fuzzy math,” finally.

  8. 1539days says:

    Guys like Krugman have been saying tat we could have a debt 200% of GDP and be fine. If we keep going along this way, we might get there. I we balanced the budgets from here on in, that $14 trillion would become a smaller part of GDP over time. Instead, we’re deficit spending even faster to maintain business’ surplus. Resurrecting myiq’s crack analogy, Instead of facing withdrawl, we’re gonna keep doing crack. When we build up a tolerance, it’s time for a bigger vial of crack. Eventually, we’ll either have to get off the stuff or die.

  9. Ya. Clinton era high employment, good salaries, few bankruptcies, few foreclosures. Must have been doing something wrong.

  10. imustprotest says:

    Like Hillary used to say, “what part of peace and prosperity didn’t you like?”

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  12. Lola-at-Large says:

    Welcome to the Golgafrinchan B-Ark, myiq. Don’t you know that on Earth money grows on trees?

  13. votermom says:

    Late to this thread but I want to ditto Wynn here:

    the business community in this country is frightened to death of the weird political philosophy of the President of the United States

    It’s not just the business community — all of us are freaked out by Obama’s weird political philosophy.

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