To Understand Deficit, See Big Picture
Posted: January 5, 2013
Open Forum
After 9/11, several investigations found that America was taken by surprise because a “groupthink” lulled the government into ignoring warnings that such an attack was likely. Now that the Mayan apocalypse and fiscal cliff sillies are behind us, it is time to consider a real problem — the groupthink that federal budget deficits are leading toward another disaster.
We are told that the government must live within its means just as a family must do. This is a myth: Before families can get dollars to spend, the dollars have to exist. Only the federal government creates dollars, which it does by spending more than it receives from taxes. No family can do that. The groupthink that the government is just like a family is backwards, because when it comes to money, the government is the opposite or mirror image of everyone else.
The only way to understand the federal deficit is by looking at the whole economy. The Integrated Macroeconomic Accounts of the United States show that in 2010, for example, the government ran a deficit that created $1,462 billion new dollars. Families, businesses and state and local governments used the dollars to pay down their debts and save $981 billion. Other countries got $480 billion because we imported more than we exported. The $981 billion, plus the $480 billion, equaled $1,462 billion — the exact amount of the federal deficit!
If families and others take dollars out of the economy by reducing their debts, saving and importing more than they export, the economy slows down unless the dollars are replaced. And it can’t speed up unless even more dollars are added.
The reverse is also true. The federal debt has been reduced during seven multi-year periods: 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, 1920-30, and 1998-2001. The first six periods led to America’s six depressions of 1819, 1837, 1857, 1873, 1893, and 1929. The seventh led to the Great Recession after the housing and credit bubbles collapsed. When the government reduced the debt by running a surplus, it took money out of the economy and a slowdown was inevitable. Each depression required large deficits to replace the money that had been removed, as is happening today.
Deficits are partly caused by automatic tax reductions and income supplements for those who lose their jobs when the economy slows down. These are not problems to fix, they are safety features. And despite alarmists’ claims, federal deficits are normal. Since 1790, the government has run them more than 80 percent of the time when it was not running surpluses that led to depressions.
An analogy is a novice driver who hits the brakes and tries to steer out of a skid — just the wrong reactions. The groupthink reaction to reduce the deficit with more taxes and austerity programs when the economy starts to skid is just as wrong but there is no driver education for the economy. Thus, few understand that spending is the economy’s accelerator, taxes are its brakes, and investment programs are its steering wheel. As with a car, driving the economy safely requires knowing when and how to use all three.
Instead, the media and most political leaders just reinforce the groupthink. They tell us not to use the accelerator even when going up a hill, never to brake harder and to steer as little as possible. But they never explain how that can work.
The only way to keep this groupthink from causing another national disaster is to learn why it is wrong. Ask those who want to reduce the federal debt with payroll taxes and austerity programs to explain: When has that ever worked in this country or anywhere else? Why could reducing the federal debt for an eighth time lead a different outcome than the previous seven? How can reducing the federal contribution to the money supply and gross domestic product create jobs and help the economy expand?
The country will continue to flounder until voters and their leaders understand that there are no positive answers to those questions.
Thornton Parker lives in Harrisonburg.
We are told that the government must live within its means just as a family must do. This is a myth: Before families can get dollars to spend, the dollars have to exist. Only the federal government creates dollars, which it does by spending more than it receives from taxes. No family can do that. The groupthink that the government is just like a family is backwards, because when it comes to money, the government is the opposite or mirror image of everyone else.
The only way to understand the federal deficit is by looking at the whole economy. The Integrated Macroeconomic Accounts of the United States show that in 2010, for example, the government ran a deficit that created $1,462 billion new dollars. Families, businesses and state and local governments used the dollars to pay down their debts and save $981 billion. Other countries got $480 billion because we imported more than we exported. The $981 billion, plus the $480 billion, equaled $1,462 billion — the exact amount of the federal deficit!
If families and others take dollars out of the economy by reducing their debts, saving and importing more than they export, the economy slows down unless the dollars are replaced. And it can’t speed up unless even more dollars are added.
The reverse is also true. The federal debt has been reduced during seven multi-year periods: 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, 1920-30, and 1998-2001. The first six periods led to America’s six depressions of 1819, 1837, 1857, 1873, 1893, and 1929. The seventh led to the Great Recession after the housing and credit bubbles collapsed. When the government reduced the debt by running a surplus, it took money out of the economy and a slowdown was inevitable. Each depression required large deficits to replace the money that had been removed, as is happening today.
Deficits are partly caused by automatic tax reductions and income supplements for those who lose their jobs when the economy slows down. These are not problems to fix, they are safety features. And despite alarmists’ claims, federal deficits are normal. Since 1790, the government has run them more than 80 percent of the time when it was not running surpluses that led to depressions.
An analogy is a novice driver who hits the brakes and tries to steer out of a skid — just the wrong reactions. The groupthink reaction to reduce the deficit with more taxes and austerity programs when the economy starts to skid is just as wrong but there is no driver education for the economy. Thus, few understand that spending is the economy’s accelerator, taxes are its brakes, and investment programs are its steering wheel. As with a car, driving the economy safely requires knowing when and how to use all three.
Instead, the media and most political leaders just reinforce the groupthink. They tell us not to use the accelerator even when going up a hill, never to brake harder and to steer as little as possible. But they never explain how that can work.
The only way to keep this groupthink from causing another national disaster is to learn why it is wrong. Ask those who want to reduce the federal debt with payroll taxes and austerity programs to explain: When has that ever worked in this country or anywhere else? Why could reducing the federal debt for an eighth time lead a different outcome than the previous seven? How can reducing the federal contribution to the money supply and gross domestic product create jobs and help the economy expand?
The country will continue to flounder until voters and their leaders understand that there are no positive answers to those questions.
Thornton Parker lives in Harrisonburg.