Mitchell’s laws: The more budgets are cut and taxes increased, the weaker an economy becomes. Until the 99% understand the need for deficits, the 1% will rule. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Here is a recent article published by the Congressional Budget Office. To eliminate government-speak and other gobbledegook, I’ve supplied translations:
Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013
May 22, 2012
Policymakers are facing difficult trade-offs in formulating the nation’s fiscal policies. On the one hand, if the fiscal policies currently in place are continued in coming years, the revenues collected by the federal government will fall far short of federal spending, putting the budget on an unsustainable path.
Translation: Deficits are unsustainable.
On the other hand, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion.
Translation: Reducing the “unsustainable” deficits will hurt the economy.
In fact, under current law, increases in taxes and, to a lesser extent, reductions in spending will reduce the federal budget deficit dramatically between 2012 and 2013—a development that some observers have referred to as a “fiscal cliff”—and will dampen economic growth in the short term.
CBO has analyzed the economic effects of reducing that fiscal restraint. It finds that reducing or eliminating the fiscal restraint would boost economic growth in 2013, but that adopting such a policy without imposing comparable restraint in future years would have substantial economic costs over the longer run.
Translation: Reducing deficits hurts the economy in the short term but somehow helps the economy in the long term, even though each year, the following year is short term.
How Substantial is the Fiscal Restraint in 2013?
CBO estimates that the combination of policies under current law will reduce the federal budget deficit by $607 billion, or 4.0 percent of gross domestic product (GDP), between fiscal years 2012 and 2013.
The resulting weakening of the economy will lower taxable incomes and raise unemployment, generating a reduction in tax revenues and an increase in spending on such items as unemployment insurance. With that economic feedback incorporated, the deficit will drop by $560 billion between fiscal years 2012 and 2013, CBO projects.
Translation: Reducing the deficit will weaken the economy next year, because reducing the deficit always weakens the economy “next year.”
With that Fiscal Restraint, What Will Economic Growth Be in 2013?
Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half.
Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.
Translation: Not only will reducing the deficit weaken the economy, but it will cause a recession — next year.
How Would Eliminating or Reducing the Fiscal Restraint Affect the Economy in the Short Run?
CBO estimates, the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, well above the 0.5 percent projected for 2013 under current law.
Translation: Increasing the deficit will grow the economy significantly more than under currently projected deficit spending.
How Would Eliminating or Reducing the Fiscal Restraint Affect the Economy in the Long Run?
However, eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income in the longer run relative to what would occur if the scheduled fiscal restraint remained in place. If all current policies were extended for a prolonged period, federal debt held by the public—currently about 70 percent of GDP, its highest mark since 1950—would continue to rise much faster than GDP.
Translation: Increasing deficits will increase the debt/GDP ratio. [Aside: We have no idea why this is bad, but people seem to think it is, so we’ll mention it here.]
Such a path for federal debt could not be sustained indefinitely, and policy changes would be required at some point. The more that debt increased before policies were changed, the greater would be the negative consequences—for the nation’s future output and income, for the burden imposed by interest payments on the federal debt, for policymakers’ ability to use tax and spending policies to respond to unexpected challenges, and for the likelihood of a sudden fiscal crisis.
Translation: Deficits increase output and income. Deficits have a negative consequence for – output and income. Though increases in federal debt are economically beneficial, they are an economic burden.
Taxes hurt the economy and spending benefits the economy. But, higher debt means the government won’t be able to hurt the economy or benefit the economy in the future.
Deficit spending cures an economic crisis. But, we don’t want deficit spending, in case there is an economic crisis.
And the longer the necessary adjustments in policies were delayed, the more uncertain individuals and businesses would be about future government policies, and the more drastic the ultimate changes in policy would need to be.
Translation: The longer we wait to increase deficit spending, the worse the situation will be. But don’t increase deficit spending – because that will make the situation worse.
What Might Policymakers Do Under These Circumstances?
They could address the short-term economic challenge by eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years—but that would have substantial economic costs over the longer run.
Alternatively, they could move rapidly to address the longer-run budgetary problem by allowing the full measure of fiscal restraint now embodied in current law to take effect next year—but that would have substantial economic costs in the short run.
Or, if policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.
Translation: For 2013, increased deficits and debt will be good, but for 2014 and thereafter, deficits will be bad, because they will increase the debt. Let’s put it this way, short term or long term, we really don’t know what the hell we are talking about.
[Note to reader: The above is considered “mainstream economics” as espoused by such great institutions as Harvard, the University of Chicago, Stanford, and the Congressional Budget Office, while Monetary Sovereignty is considered “heterodox.”
To paraphrase an old saying, “If we are fooled by these fools, we and our money soon will be parted.”]
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports