●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity starves the economy to feed the government, and leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Every so seldom, a notorious debt-hawk will publish an admission that well, yes, not just federal debt, but growing federal debt is necessary for the survival and growth of our economy.
The reality of trying to shrink government
By Lawrence Summers, Published: August 19, 2012
Lawrence Summers, a professor and past president at Harvard University, was Treasury secretary in the Clinton administration and economic adviser to President Obama from 2009 through 2010.
There is a widespread view in both parties that it is feasible and desirable that in the future the federal government should be no larger as a share of the overall economy than it has been historically.
RMM: Yes, it is the widespread view – the wrong view, but widespread. Unfortunately, no one in either party explains why the government’s share of GDP should be no greater than it “has been historically.” The reason for this omission: There is zero economic significance to the debt/GDP ratio.
Second, exactly what has that “historical” ratio been?
(“FGSDODNS” is federal debt. “GDPA” is Gross Domestic Product)
As you can see, the Debt/GDP ratio has had no relationship with Gross Domestic Product growth, and has bounced all over the place — and there is no “historical” ratio.
For structural reasons, even preserving the amount of government functions that predated the financial crisis will require substantial increases in the share of the U.S. economy devoted to the public sector.
First, demographic change will greatly expand federal outlays unless politicians decide to degrade the level of protection traditionally provided to the elderly. Between Social Security, Medicare, Medicaid and some smaller programs about 32 percent of the federal budget, or about 7.7 percent of gross domestic product, is devoted to supporting those over 65.
RMM: Or we can accept the right-wing extremism of self sufficiency – until those same right wing “John Waynes” reach elderly status, at which time they pitifully will cry, “Help me, help me, I’m old and sick and broke.”
As Americans’ health and life expectancy improve, it may be appropriate to revise upward the assumed retirement age. That would, however, be unlikely to counteract the expected 34 percent increase in the share of the population over the next generation who will be within 15 years of estimated life expectancy.
RMM: “Revise upward” expresses the extreme right-wing, “Work ‘til you drop” philosophy, which again, they are guaranteed to disavow, once they get there. (“What? I have to work until I’m 75? Who will hire me? I’m too weak for the physical labor I once did. Wah wah wah.”)
Second, the accumulation of more debt and a return to normal interest rates will raise the share of federal spending devoted to interest payments.
RMM: Yes, those who invested in Treasury securities, will expect to earn interest on their investment. And then, they will spend that interest money, which will stimulate the economy. And by the way, what is a “normal” interest rate”?
Third, increases in the price of what the federal government buys relative to what the private sector buys will inevitably raise the cost of state involvement in the economy. Since the early 1980s the price of hospital care and higher education has risen fivefold relative to the price of cars and clothing, and more than a hundredfold relative to the price of televisions.
RMM: Fundamentally correct, though the private sector pays for most higher education, which is why we have all those excessively indebted college graduates. In truth, the federal government should finance higher education.
If government is to continue providing the same level of these services, government spending as a share of the economy has to rise, by at least 3 percent of GDP.
RMM: Or, we can do as the Tea/Republican Party wishes, and cut government benefits for the 99%, ala European austerity. That seems to work nicely for Greece, France, Italy, Spain et al, whose people very soon may begin to build guillotines for their leaders.
Fourth, several methods that have been used to repress the deficit, such as federal pension liabilities and the deferred maintenance of federal infrastructure, will soon be unsustainable.
RMM: Right: Spending of pension dollars grows the economy, while infrastructure spending reduces unemployment. And by the way, our Monetarily Sovereign federal government can afford both.
Meanwhile, there is a steady decline in the fraction of tax returns that are audited and evidence of growing tax noncompliance. Both reflect unsustainable cuts in spending. And on almost any reasonable view of the state’s responsibility, large increases in inequality such as those observed in recent years should call forth increased government activity.
RMM: Almost buried in the article is the media-denied fact that federal deficit reductions always increase the gap between the upper income 1% and the 99%. (Yet, in the next election, millions of Americans will vote to reduce the federal deficit. Go figure.)
Defense spending, which represents 4.7 percent of GDP could be reduced significantly. But our military is badly stretched by sustained deployments.
Technology could greatly reduce government costs in some areas, the largest parts of the federal budget involve cash or in-kind transfers (which) are far less susceptible to productivity-enhancing technologies. (Also) efforts to identify waste, fraud and abuse invariably come up with only negligible savings.
RMM: In short, even Lawrence Summers has come to understand there is no economically sound way to reduce deficits and many reasons not to. But that won’t change the minds of most politicians and right wing extremists (Is there a difference?), who will continue to claim, “It is feasible and desirable that in the future the federal government should be no larger as a share of the overall economy than it has been historically.”
For the next three months the nation will debate the merits of growing vs. shrinking government. But for the next three decades the United States will confront the reality that major structural changes in its economy will compel an increase in the public sector’s fraction of the total economy unless the functions that the federal government has long performed are substantially scaled down.
RMM: “The merits of growing vs. shrinking the government” should be the debate, but unfortunately it is not. The debate has devolved to: “How to shrink the government” aka “How to send us into depression while increasing the gap between the 1% and the 99%.”
But at least and at last, Lawrence Summers seems to get it. That’s one. Is there now hope for the rest of the 300 million?
Rodger Malcolm Mitchell
Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America
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 Imports
4 thoughts on “–Former (?) Debt-Hawk Admits Federal Debt is Necessary”
On the point about health care and education, it seemed like Summers was making a good point and you partially dismissed it. Through Medicare, Medicaid etc…and FAFSA/federally subsidizrd student loans…. haven’t those had a major impact in driving up the price of healthcare and education?, through hundreds of billions, maybe trillions, of federally subsidized funding?
Yes, increasing usage will tend to increase prices. The alternative is decreased usage.
What is the “correct sized” government?
Clearly you don’t want a oppressive and dysfunctional Soviet style totalitarian centrally planned nightmare, but the polar opposite of no government is possibly even worse – at least in Russia you got health care and an education… So somewhere in between likely is a happy median where you have enough government to provide the services, such as health education, roads etc. that a society desires, and is for each society to work out for itself. I can’t see there being a one size fits all solution.
Mindless dogma such as “small government is good”, without ever defining what that really means, or what role you expect governemnt to play, is really unhelpful.
In Russia, the government directs the economy. I envision an economy in which the government provides the funds, and the private sector directs the spending. See #s 1-9, above.