Since we had some technical difficulties last night – apparently, the Russians hacked us – we didn’t have time to address one of the main points to understanding deficit spending: You need a target for it to be immediately effective. So, let us address this topic presently.
We recall from last night’s discussion on Real Progressives with Steven Grumbine, that Democrats make the mistake of vilifying federal deficits solely on the grounds that Republicans typically run them. In other words, “Let’s just do the opposite of what Republicans do so that we can be somehow ‘different’ than Republicans.” As we can clearly see from our review of the Sectoral Balances, this viewpoint is not only errant and highly irrational, but if pursued as policy, it is also extremely damaging to the US domestic economy in the face of a current account deficit. Deficit reduction and achieving a budget surplus in conjunction with a current account deficit forces the US domestic economy into deficit, and thus, such activity is totally inconsistent with achieving a prosperous economy.
When the federal government deficit spends, it is depositing new dollars into the non-government sector. Since the US imports more than it exports, some of those dollars are flowing out of the US domestic economy and into foreign hands where those dollars are no longer available to US citizens to spend. This condition “drains” dollars out of the economy, thus lowering consumer spending. As consumers on aggregate reduce their spending, business income decreases and there is a fall in demand for production, so excess workers are laid off and the unemployment rate rises. Because the US Government is the monopoly issuer of US dollars, it must then stand ready to add more dollars to the US private sector to counter the ‘leak’ of dollars flowing out through imports. If it does not do this, then eventual stagnation will occur, a condition where job additions cease and economic growth halts. If during that period of stagnation the US Government persists in deficit reduction, a recession will occur. So, that is why federal deficits are entirely necessary. However, what the average Democrat must understand and come to terms with, is that this doesn’t mean that Republicans are right either. Since the US imports more than it exports, it is always a good time to ‘blow up’ the deficit; just not HOW the Republican Party blows up the deficit.
As we can see, it is not the deficit that is the problem. The problem is what the Republican Party is spending the new dollars on. They are targeting the spending of those new dollars created at all of the wrong things for prosperity to take root.
This is the obvious, but apparently too subtle, point for many Democrats to grasp. We can understand their quandary, because the average Democrat is inundated with political nonsense flowing daily from the party and the media. Federal deficit spending is not Ronald Reagan’s “trickle-down economics”, “Voodoo economics”, or whatever other term you wish to use to define ‘Supply-Side Theory’. While tax cuts can create a condition of budget deficit, the resulting budget deficit is not in and of itself, trickle-down economics. The federal deficit has nothing to do with trickle-down economics. To determine if Reagan’s trickle-down approach is being utilized, we must look at who and what the deficit is being targeted towards. So, if we see the deficit expanding because of tax cuts for the wealthy under the guise of “creating jobs”, yet there is no real spending that is targeted at the populace itself, then you might have a case for trickle-down being present. But again, the presence of an expanding federal deficit or a deficit itself is not an indicator of trickle-down economics at work. To put it in simple terms: Federal deficits are absolutely necessary; trickle-down economics is mismanagement of the deficit.
Trickle-down economics is one type of deficit targeting.
The federal deficit must be targeted at things which engender prosperity and the public purpose.
Trickle-down economics is the intentional targeting of the federal deficit at a select segment of the population and away from prosperity for all.
Trickle-down economics is the intentional targeting of the federal deficit at all of the wrong things.
Consequently, deliberately slashing the federal deficit out of existence, as Occupy Democrats and the Democratic Party demands, is also the wrong thing to do. To bring about a condition of prosperity and sustain it in perpetuity, the federal deficit must be targeted at full employment and the public purpose.
In 1972, the Democratic Party understood this reality:
“Full employment – a guaranteed job for all – is the primary objective of the Democratic Party.” — The Democratic Party Platform, 1972
And also, concerning federal deficits and fiscal policy:
“To assure jobs and economic security for all, the next Democratic Administration should support: A full employment economy MAKING FULL USE OF FISCAL and monetary POLICY to stimulate employment…” — The Democratic Party Platform, 1972
Some would attempt to defend today’s Democratic Party and its irrational position of slashing the federal deficit by appealing to a “that was then, this is now, and a lot has changed since 1972” argument. However, the passage of time does not negate the reality that increased federal deficit spending towards employment decreases the unemployment rate and also creates prosperity for all, because both in 1972 and in 2017, the US Government was and still is today the monopoly issuer of the US dollar. US dollars come from nowhere but the US Government. In reality, the only thing that has changed since 1972, is that Wall Street and corporate America maintained their grip on the Republican Party, then set their sights on the Democratic Party to create a win-win situation for the 1%, no matter which party wins. They have influenced the Democratic Party to abandon the working man and woman, ignore the 99%, slash the deficit, maintain involuntary unemployment, promote low-wage underemployment and privatization efforts, and increased speculation while pushing private debt onto the population to sell production. In short, neoliberalism infected the Democratic Party with the coming of the “New Democrats” and has now all but reduced the party to a shell of its former self. As far as the economics goes, the Democratic Party today is the politically undead – a zombie of neoliberalism – which is in no condition to mount any real challenge to the GOP of today, nor to achieve and sustain a condition of prosperity and full employment.
Targeting The Deficit at Prosperity is Sensible Policy; Not Voodoo Economics
We begin our journey towards understanding why the Democratic Party is wrong on deficits, by coming to terms with the fundamental rule of macroeconomics:
Somebody’s spending is always somebody’s income.
There is absolutely no way around this reality. All that can be done by a person upon hearing it, is to come to terms with it and accept it. When the person does, he or she is finally in a position to understand where the Democratic Party goes wrong.
The Fallacy of Composition
The average person is inundated by politicians and the media with an analogy drawn between household budgets and the federal budget in order to facilitate a complete misunderstanding of how the monetary system works. We hear that the federal government has no money of its own, so like a household, it must have an income. Therefore, the federal government must tax to fund its spending. If the federal government wants to “live beyond its means”, spending more than its income, then it must do like households do and borrow “money”. The government borrows by issuing treasury bonds. Just like a household, when the federal government persistently borrows, it goes deeper and deeper into debt.
If you’ve read or heard my previous discussions, then you know that the household analogy is entirely false, because there is no gold standard any more. The possible reasons for why politicians and the media would want to spread anti-knowledge to the public we will not discuss here. There are two areas in economics: the microeconomy and the macroeconomy. They are vastly different. Microeconomics tries to understand the effects individual decisions have on the economy. In other words, microeconomics examines the question: “Exactly how many angels can dance on a pinhead?” and then tries to apply that reasoning to the whole economy. Macroeconomics concerns itself with the economy on aggregate. Generally speaking, the two aren’t compatible with one another, which is why mainstream economics is a failure. The micro to macro view leads people to believe in nonsense, such as the idea that the federal government can save its way out of a recession. The household analogy seeks to apply the micro viewpoint to the macro viewpoint, and, in doing so, falls victim to the Fallacy of Composition. Let us briefly examine this fallacy as it relates to saving.
Here we have a fellow named Bob. Hi, Bob! Bob makes $25,000 per year. Bob examines his budget and discovers that he is spending far too much and needs to save money. Bob takes a hard look at his expenses, trying to find cuts to pay for other things. Sound familiar? Bob discovers that his daily Starbucks habit is out of control. He is forking over $50 per week on lattes when he needs that $50 for groceries. So, Bob decides cut out Starbucks altogether. Bob does so, and saves $50. Good for Bob! Bob is saving money. But, there’s something else about Bob that, for him, makes this $50 savings possible, but not possible for the federal government. Bob is a mere user of the federal government’s US Dollar. He cannot manufacture more dollars on the fly. Unlike the US government, Bob actually needs and income to fund his spending – So does everyone else in the private sector.
Let us now assume that Bob took to the media, extolling the financial virtues of cutting out Starbucks, and everyone else in the US who visits Starbucks got wind of Bob’s plan to save money. Everyone thinks Bob’s plan is just awesome; so much so, that everyone else decides to cut out Starbucks altogether to save money. Now everyone is saving lots of money. Good for everyone! Not good for Starbucks and its employees.
If everyone stopped visiting Starbucks in order to save money, Starbucks would lose its income and go out of business, firing all of its employees too. Every, single person who used to work for Starbucks would now be unemployed, and since they have no income, they would reduce their spending. Now, even more people are not spending at other businesses. Increased savings on aggregate means decreased consumer spending, and thus, increased unemployment. In other words, the United States as a whole, can’t save its way out of a recession. Should the federal government as the currency-issuer attempt to cut spending and save along with the private sector, much needed additional dollars necessary to increase consumer spending and decrease unemployment, would not be entering the economy, and the recession would only deepen. The household analogy falls prey to the fallacy of composition, because the micro level does not apply to the macro level. Since the federal government is the exclusive manufacturer of US Dollars, budget deficits are the only means to add more new dollars to the US private sector. Deficits are not “short falls” for the federal government, but rather, they are “deposits” of US Dollars into the private sector.
Federal Budget Deficits Properly Defined
A federal budget deficit is errantly defined by the mainstream as when the government spends more than its income. This is simply not true, because, at no point in time, does the federal government have an income. Factually, a federal budget deficit is the difference between the number of US Dollars manufactured and spent by the US government and the number of US Dollars destroyed afterwards through taxation in any given fiscal year. Mathematically, we can express a budget deficit as (G – T > 0), where government spending (G) minus taxation (T) is greater than zero.
Review of US Dollar Creation
In the United States, the currency manufacturing process begins when Congress authorizes spending for various federal initiatives, which the mainstream refers to as “the federal budget”. Once the President has signed the “budget”, the currency manufacturing process is complete. If the total authorized is $4 trillion, then $4 trillion has been manufactured and is now awaiting disbursement. Disbursement is the act of paying out or disbursing money, which in the case of the federal government, is the paying out of “money” that the government created, through the process known as federal spending.
The US Dollar manufacturing process does not involve printing machines at the Bureau of Engraving and Printing, nor does it involve coin stamping by the US Mint. There is no storage facility for the $4 trillion manufactured by Congress. The manufacturing of US Dollars means, quite simply, that Congress has authorized the US Treasury to enter various bank accounts and credit those bank accounts with no more than $4 trillion within that particular fiscal year, unless otherwise instructed to increase that amount. To understand the simplicity of the concept, let us use a more familiar, but imperfect, example.
Apple manufactures and then sells iPads. Let us assume that Apple decides that this year it will manufacture 10 million iPads. It then authorizes its production facilities to begin manufacturing 10 million iPads, which they do, and Apple then disburses (ships) those iPads to retailers.
In a similar way, the US government manufactures and then issues US Dollars every year. It is the constitutional duty of Congress to ensure that the US government will supply the US domestic economy with US Dollars and also determine the appropriate level of taxation for that particular fiscal year. Each year, Congress must, therefore, decide how many dollars the federal government will manufacture and how many it will reclaim through taxation and destroy. Then, when approved by the President, the US Treasury is authorized to begin disbursements of those newly manufactured US Dollars. In the case of US Dollars, manufacturing is not the physical creation of a product, but rather, it is the decision to set the level of US Dollar injections into the private sector to a fixed amount for that particular fiscal year. Congress has the authority to manufacture and then disburse an infinite number of US Dollars. So, when Congress sets the US Dollar manufacturing output to a certain level in any given fiscal year, Congress is actually setting a limit on the number of US Dollars it will allow to be created and then disbursed by the US Treasury.
The Function of Federal Budget Deficits
On a daily basis, the federal government is crediting bank accounts with newly manufactured US Dollars (federal spending), and it is also removing US Dollars from reserve accounts (federal taxation) that the US government previously manufactured and spent. All federal spending comes before federal taxation; not the other way around. If the number of US Dollars manufactured and then disbursed into the economy are greater than the number taxed out of the economy, then a federal budget deficit exists. Operationally, the reality is that a federal budget deficit is income for the private sector.
Now then, when the Republican Party aims deficit spending at a rich person through tax cuts, the rich person already has more dollars than he or she will ever need, thus the rich person tends to save those extra dollars and never actually increases his or her spending. Since the rich person’s spending remains relatively constant, the extra dollars that the rich person was allowed to keep through tax cuts never enter the economy and so, become what we call a “demand leakage”. A demand leakage is a condition where dollars are being saved rather than spent. Spending of dollars is required by consumers to keep demand high and unemployment low. If the rich person hoards the extra dollars, then another person cannot get his or her hands on the dollars to spend them, because somebody’s spending is somebody’s income. If the rich are not spending, then the tax cuts are entirely useless to the economy.
Let’s look at another example. If the Republican Party aims deficit spending at, say, a military contractor in Tampa Bay, Florida, then those dollars immediately benefit the contractor and its employees. In a very short time, as the employees are paid and spend their dollars on food, clothing, and other goods and services, the deficit spending begins to benefit the communities of Tampa Bay, Florida, because again, somebody’s spending is somebody’s income. But what about the rest of the nation?
Well, not so much. Sure, there is Amazon and modern online purchasing of goods, but on the whole, most of those newly created dollars deficit spent in Tampa will take quite a while to wind their way around the nation, and the rest of the nation doesn’t have the time to wait around. This is not to say that military spending is always inefficient or somehow intrinsically bad, but to say that while it is a valid, necessary and useful public purpose item, the military is not the only thing, nor is it even the most important thing in the US that requires funding by the US Government. Overspending on the military, when there is no clear need to do so, while letting the entire economy flounder, is extremely poor targeting of deficit spending.
So, if the federal government targets deficit spending at something in Tampa Bay, then that something in Tampa Bay will derive immediate benefit. The rest of the nation will not. The same applies to aiming deficit spending at a select few things around the nation. Those select things will benefit immediately and the rest of the nation will be forced to flounder while waiting for the benefits that might take years to arrive. The key, then, to deficit spending is to target those things which will have the most efficient, immediate, and widespread impact as possible.
A condition of full employment we define as less than 2% unemployment at all times and no hidden unemployment, no involuntary underemployment. Put simply, full employment is a condition as defined by the 1972 Democratic Party to be “a guaranteed job for all” where all who want a job can easily get a job at decent pay guaranteed.
By initiating a federal Job Guarantee, the deficit is aimed directly at ending involuntary unemployment, and those dollars created immediately impact all those who are involuntarily unemployed. The dollars immediately appear in their paychecks and those dollars are then immediately spent, thus immediately benefiting all US communities and all 50 states. As the deficit is aimed continuously and automatically at the job guarantee, continuous and automatic immediate benefit is realized in all US communities and all 50 states.
A healthy workforce is a happy, productive workforce. A healthy population is a happy, productive population. Deficit spending aimed at providing no-cost healthcare to all US citizens immediately eliminates the need for citizens to spend much of their income on healthcare or dip into their savings to pay for healthcare services, and so those dollars which would have gone to healthcare, can now be used for greater spending on goods and services which will help engender and maintain prosperity for all.
Tuition-Free College Education
The moment you put a price tag on education is the moment that you mortgage the nation’s future. Deficit spending aimed at providing tuition-free college education opens the door immediately to our young people, allowing them to pursue education without financial fear and later financial devastation. In turn, this translates into a future population that can participate fully in a future economy. In other words, it advances the economy and society.
This item goes without saying. We desperately need high capital-intense work to be done – lots of it. Because we’ve allowed our nation’s infrastructure to literally collapse for the last 40 years, trillions of dollars will be needed to repair and to modernize it just to bring our infrastructure into the 21st Century. As we reinstate a production-based economy, especially one that vacates the industrial revolution sense of production and welcomes output that is directed towards sustainability, we will need modernized utilities, airports, railways, roads, highway systems, bridges, broadband, on and on. High speed rail for commuters, travelers and vacationers, is highly efficient and also results in far less pollution than other forms of travel. Concrete highways and roads are 1970’s technology. Solar roads are modern solutions that do not allow ice and snow to accumulate on them, thus deficit spending aimed at solar roads has an immediate impact on reducing accidents, insurance claims, injuries and deaths, while also eliminating the need for dollars spent on salt and roadway clearing in winter time. Because plows are mostly unnecessary, pollution and inefficient gas and oil consumption is reduced. Infrastructure work also increases paychecks, thus aiming the deficit at infrastructure provides immediate benefit to workers, consumers and business.
As current transportation is dependent on fossil fuels to get goods to market, foreign oil suppliers can affect the economic well-being of the population should they restrict the supply of oil or should the supply begin to run low. Without an alternative in place, as the supply drops, the price level of all goods and services will begin to rise. Such a condition is totally unnecessary and easily avoidable by targeting deficit spending at sustainable energy sources like the sun and wind. As we can see, this is not a political argument, but rather, an entirely necessary economic argument if prosperity is to be achieved and sustained long term. There is simply no way to avoid it. Remaining dependent on oil, even with American oil companies drilling in America is an inefficient and poor choice. The economy cannot grow infinitely, but it must grow if there is to be prosperity. Therefore, we have to begin making use of sustainable energy and output for the economy to begin growing again. This will require deficit spending on windfarms, and the installation of solar collectors and technology in and on homes, buildings, and businesses nation-wide. Tesla has demonstrated that a battery-powered car can be luxurious, sporty, fast and generally no different than a gas-powered car, except that it contains no engine. This translates immediately into consumer savings on oil changes, repairs and maintenance and those dollars can now be spent on other things that consumers need. Power grids must be updated. Deficit spending that targets sustainable energy will have a tremendous and immediate beneficial impact on everyone’s quality of life and everyone’s wallet.
Federal taxes must be suspended for the majority of US citizens. Let us consider the FICA tax. Since FICA does not fund Social Security, nor is it even necessary to do so since the US Government is the monopoly issuer of US dollars, so Social Security cannot become insolvent in terms of US dollars, FICA is nothing more than a large income tax on working men and women which serves only to stifle consumer demand. It should be suspended until inflationary pressures demand its return for a time. Furthermore, the income tax burden on most of the population should either be dramatically reduced or suspended while the income tax burden on the extremely wealthy and the 1% should be dramatically increased. An increase in federal taxes on the rich is not to fund federal spending, but rather to destroy extreme wealth in terms of US dollars and to promote better equity among the population. Again, federal taxes are not collected because the US Government needs an income so that it can ‘afford’ to fund things. Federal taxation is a separate operation to federal spending, and in no way acts as an income source for the US Government. All federal spending is dollar creation and all federal taxation is dollar destruction. Understanding this simple premise allows us to understand that the extremely rich should be taxed, not so that we can afford to have nice things, but to reduce the hoard of US dollars the rich have amassed, destroying those dollars to create a situation of better equity.
So, in conclusion, as we can clearly understand now, it’s always a good time to ‘blow up’ the deficit; just not how the Republican Party blows up the deficit.