Re: The Need for a Budget Deficit
- From: "Zerge" <zerge@xxxxxxxxxxx>
- Date: 17 Oct 2005 09:23:55 -0700
William F Hummel wrote:
> The following article, was written by the Nobel Laureate William
> Vickrey and published August 6, 1993:
>
> We Need a Bigger Budget "Deficit"
>
> We are not going to get out of the economic doldrums as long as we
> continue to be obsessed with the unreasoned ideological goal of
> reducing the so-called deficit.
>
> The So-Called Budget "Deficit"
>
> The "deficit" is not an economic sin but an economic necessity. Its
> most important function is to be the means whereby purchasing power
> not spent on consumption, nor recycled into income by the private
> creation of net capital, is recycled into purchasing power by
> government borrowing and spending. Purchasing power not so recycled
> becomes non-purchase, non-sales, non-production, and unemployment.
>
> A Private Capital Approach to Full Employment
>
> We have not had a satisfactory approach to full employment, except in
> wartime, since 1926. Over much of this century trends in the ratio of
> profitable private capital to national product have been downward, as
> a result of capital saving innovation such as fiber optics, the trend
> to light industry away from steel mills and other heavy industry, and
> the increasing importance of services. Prospects are that for the
> foreseeable future the capacity of private industry to find profitable
> use for private capital will be not much greater than two years of
> gross domestic product.
>
> On the other hand aspirations of individuals to acquire assets to
> provide for retirement and other purposes have been growing, due to
> longer life expectancy, higher retirement aspiration levels, the
> loosening of family ties, the development of expensive medical
> technologies, and other factors. Current aspirations appear to be
> moving towards three years or more of gross domestic product. This
> leaves a gap to be filled by government debt of about one year of
> gross domestic product.
>
> Government Debt to Fill the Gap the Private Sector Cannot Fill
>
> If we aspire to a satisfactory level of full employment by 1998,
> whereby anyone not too finicky about the type of work could find a job
> at a living wage within 48 hours, this will, if we assume inflation to
> average about 3%, call for a gross domestic product of about 10
> trillion dollars. To fill the gap between the asset aspirations of
> individuals at this level of income and the ability of the private
> sector to provide assets, the supply of government securities would
> have to rise to 10 trillion dollars, implying a level of income
> recycling by governments of about one trillion a year on the average
> over the next five years.
>
> Paying for the Debt that Fills the Gap
>
> Once this level is reached, to continue in equilibrium the supply of
> government securities will need to grow pari passu with the gross
> domestic product, to correspond to the gap between the demand of the
> population for assets and the provision of assets by the private
> sector. Whatever interest charges on the debt are not financed out
> of this growth in the debt can more than be met out of savings in
> unemployment insurance payments, and the increased tax revenues
> derived from the larger national product at rates no greater than at
> present. A 10 trillion debt with a full employment economy will be
> far easier to deal with than a 5 trillion debt with an economy in the
> doldrums.
>
> What if the Gap is Not Filled?
>
> If governments fail to fill the gap and meet the demand for assets by
> issuing an adequate volume of securities, the attempt by individuals
> to acquire assets by non-spending will cause a reduction in sales,
> temporary investment in excess inventories, cutbacks in orders,
> unemployment, and reduced national income and product. This may be
> partially offset by the bidding up of asset values, leading to a
> certain amount of additional spending out of capital gains, but the
> "saving" imbedded in these capital gains does not involve the creation
> of new capital or the employment of individuals in construction.
>
> The reduction in interest rates could in principle increase
> "deepening" types of investment in labor-saving technology, but after
> the initial stimulus the effect on employment tends to be negative.
> Little "widening" investment is likely to take place regardless of
> reduced interest rates if the market for the product is not there.
> There is a serious danger that the bidding up of asset prices could
> create a bubble of unsustainable values that is likely to collapse
> disastrously, as occurred in 1929 after the budget surpluses of the
> preceding years. Sooner or later a reduction in production and
> national income will set in until the reduction in income reduces the
> demand for assets to conform to the supply.
>
> Tangible Real Effects
>
> Reducing the "deficit" may reduce the debt of the government, but it
> also reduces the supply of assets people want to acquire to take care
> of their security needs. Reducing the "deficit" does not improve the
> real heritage left for the future, rather it impairs that heritage by
> leaving a legacy of inexperienced workers, impaired infrastructure,
> and reduced investment in plants because of reduced demand for the
> products, to say nothing of the impact of unemployment on health,
> delinquency, crime, and broken homes.
>
> The "deficit" is not even calculated on a businesslike basis. It
> makes no distinction between current account and capital account
> items. If GM, AT&T, and the nation's households had been compelled to
> "balance their budget" calculated in the way the federal budget is
> calculated, we would now have many fewer automobiles, telephones, and
> houses.
>
> Individual Saving (Absent Strong Demand) is Counterproductive
>
> Urging individuals to save more is counterproductive. Individual
> saving does not mean that funds are created out of thin air to put
> into savings accounts or the capital market; for most individuals
> savings is non-spending which becomes the non-income and reduced
> savings of the vendor. Funds are transferred from the bank account of
> the vendor to the account of the saver, there is no increase in total
> money in the bank, and no facilitation of investment, while reduced
> market demand will actually discourage investment. Savings are
> neither a prerequisite nor an inducement for investment. Rather,
> non-spending by reducing market demand lowers incentives to invest.
>
> Profitable Investment and Saving
>
> On the other hand if a businessman can show good prospects for
> profitable investment he can nearly always get credit and proceed with
> the investment, which will constitute an increase in someone's wealth
> which is ipso facto savings. Supply does not create its own demand as
> soon as some of the income generated is saved, but investment does
> create its own savings, and more.
>
> Inflation and Full Employment
>
> Eventually, in all likelihood, we will have to find some way of
> dealing with the threat of an unacceptably high rate of inflation that
> does not involve the maintenance of what Marxists used to call "the
> reserve army of the unemployed." For the moment, however, that threat
> seems sufficiently remote that we could proceed with the first steps
> towards full employment and deal with that bridge when we come to it.
> There has been no dearth of plans for controlling inflation in ways
> that preserve the essence of free markets.
>
> We Have the Resources but Don't Use Them
>
> The administration is trying to bring the Titanic into harbor with a
> canoe paddle, while Congress is arguing over whether to use an oar or
> a paddle, and the Perot's and budget balancers seem eager to lash the
> helm hard-a-starboard towards the iceberg. Some of the argument seems
> to be over which foot is the better one to shoot ourselves in. We have
> the resources in terms of idle manpower and idle plants to do so much,
> while the preachers of austerity, most of whom are in little danger of
> themselves suffering any serious consequences, keep telling us to
> tighten our belts and refrain from using the resources that lie idle
> all around us.
>
> Alexander Hamilton and William Jennings Bryan
>
> Alexander Hamilton once wrote "A national debt, if it be not
> excessive, would be for us a national treasure." William Jennings
> Bryan used to declaim, "You shall not crucify mankind upon a cross of
> gold." Today's cross is not made of gold, but is concocted of a web
> of obfuscatory financial rectitude from which human values have been
> expunged.
Interesting article. This is what I understand to be its main message:
1) People and companies want to invest their savings in securities
2) The financial market provides those securities, BUT
3) The financial market does NOT produce exchange of goods and services
and thus does not generate jobs; it's just an exhcange of titles. In
other words, wealth accumulates in the secondary financial market
(where money has zero velocity) and stops circulating in the "real"
economy of goods and services.
4) The government issues bonds (entering into debt in the process) to
compete against private securities.
5) When the government obtains money from the sale of such bonds, it
does NOT reinvest it into secondary financial markets; rather, it
spends it into the "real" economy.
6) In this way, the government manages to keep at least part of the
wealth in the real economy that otherwise would only accumulate in the
secondary financial market.
This SEEMS to make sense. Is anybody aware of empirical data supporting
or refuting this? Any thoughts?
.
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