Greenspan: Deficits are OK

[Drake Tungsten]

I have an agreement with the French.

[Ned]

Well, at least most of us now seem to agree that deficits stimulate the economy and are "good" when the economy is underperforming, when there is excess capacity and when there is underemployment. The worry about the market for treasuries depends on the real interest rate -- interest rate - inflation rate. Since inflation now is near zero, real interest rates for treasuries is pretty good even thoung they are nominally small.

So long as the economy has a lot of slack in it and we have significant underemployment, inflation should stay low and we can and should stimulate the economy. This is not the time for tax increases as such tax increases will only choke off fiscal stimulus, which may actually send us back into a recession.

[Tingkai]

Originally posted by Ned
But we know that slaming the brakes on by going into a surplus or by jacking up the interest rates - or both at the same time as was done in 2000 -- can and normally does trigger a recession.

Government surpluses trigger recessions? That certainly is a new one. Care to explain?

Originally posted by Ned
surpluses brake the economy by subtracting from it.

Highly unlikely. If a government uses a surplus to pay back debts then money is returned to the lenders who can then invest it elsewhere.

If a government has no debt then it will lend out the money so that it can earn interest, or it will cut taxes, rather than just sitting on it and doing nothing. Look at Singapore and Hong Kong during the 1990s.

[Ned]

Imran, agreed about FDR. I don't think he or anyone understood the benefit of deficit spending. When deficit spending took off during WWII, the economy launched like a rocket and we have never looked back.

[Imran Siddiqui]

at least most of us now seem to agree that deficits stimulate the economy and are "good" when the economy is underperforming

I haven't seen anyone argue this, have you?

This is not the time for tax increases as such tax increases will only choke off fiscal stimulus, which may actually send us back into a recession.

Supply side tax increases (ie, for the top 1-5% of wage earners) is not going to choke off much at all, especially since we are in a recovery. Look at the Clinton tax increases of 1993 if you want some recent history of tax increases causing calamity.

The problem is when are you going to pay the piper. You keep saying we don't have to, but that is dead wrong. One day it is going to lead to a great restructuring of the economy when investor confidence is shot by the huge deficit and instead of a semi-painful recession, we'll have a full blow depression.

[Imran Siddiqui]

Government surpluses trigger recessions? That certainly is a new one. Care to explain?

Oh lord, you don't want to know. Even though he's been shot down on this many, many, many time, he still thinks he's right on this and believes he's 'beaten' those who say otherwise.

[Kidlicious]

Originally posted by Imran Siddiqui

Hoover did try to keep the budget balanced.

But failed in it... he did run a deficit. A lot of it from the new programs he introduced.

It was a very small deficit, mostly structural. His programs were very low stimulus.

Originally posted by Imran Siddiqui

When FDR got into office, he did begin spending and the economy recovered somewhat.

And as Colon said, FDR attempted to keep balanced budgets until WW2. Remember he dramatically increased income taxes.

The economy was recovering when FDR raised taxes. Then it double dipped.

[Tingkai]

Originally posted by Ned
Well, at least most of us now seem to agree that deficits stimulate the economy and are "good" when the economy is underperforming, when there is excess capacity and when there is underemployment.

Most economist, even Keynesians, would disagree.

The 1970s showed the danger of trying to spend your way out of any recession. It simply added to higher inflation without created economic grow, hence the name stagflation.

Governments should radically increase spending only when lower interest have clearly failed to spur economic growth. This is the situation that Keynes was describing in his general theory.

Of course, government spending will naturally increase during a recession due to higher welfare and unemployment payments, but this is different from new forms of spending.

The problem with the Bush approach is that he intervened in the market before lower interest rates had a chance to work.

[Imran Siddiqui]

The economy was recovering when FDR raised taxes

Indeed, but he was conscious of balancing budgets. The point is that the recovering economy didn't immediately lead to another recession. It was fiscal policy (or playing around with fiscal policy) which did that. The recession was caused by some government programs being taken away... many because they were struck down by the SCOTUS, until they reversed course.

[Imran Siddiqui]

The 1970s showed the danger of trying to spend your way out of any recession. It simply added to higher inflation without created economic grow, hence the name stagflation.

The oil shocks also had something to do with stagflation and the lack of economic growth in the 70s. Usually a tax cut or government spending increase (leading to deficit spending) will lead to higher growth, but with great costs.

Monetary policy has much less costs and should be used first, I agree.

[Kidlicious]

Originally posted by Tingkai


Most economist, even Keynesians, would disagree.

The 1970s showed the danger of trying to spend your way out of any recession. It simply added to higher inflation without created economic grow, hence the name stagflation.

Huh? Keynesians blame stagflation on the oil shocks.

Originally posted by Tingkai

Governments should radically increase spending only when lower interest have clearly failed to spur economic growth. This is the situation that Keynes was describing in his general theory.

No. I believe that Keynes decribed situations where monetary policy would not work. He did not say that monetary policy was superior to fiscal policy.

[Kidlicious]

Originally posted by Imran Siddiqui

The economy was recovering when FDR raised taxes

Indeed, but he was conscious of balancing budgets. The point is that the recovering economy didn't immediately lead to another recession. It was fiscal policy (or playing around with fiscal policy) which did that. The recession was caused by some government programs being taken away... many because they were struck down by the SCOTUS, until they reversed course.

But the Depression ended due to fiscal policy, and many believe that the SS tax and efforts to balance the budget prevented earlier recovery.

[Tingkai]

Originally posted by Kidicious
Huh? Keynesians blame stagflation on the oil shocks.

Yes, oil price shocks were definitely the primary cause, but government spending only increased the stagflation effects.

Originally posted by Kidicious
No. I believe that Keynes decribed situations where monetary policy would not work. He did not say that monetary policy was superior to fiscal policy.

I did not mean to imply that he said monetary policy was superior to fiscal policy. My take on Keynes was that he was not an ideologue. He would apply one or the other, or a combination, depending on the situation.

[Kidlicious]

Originally posted by Tingkai

Yes, oil price shocks were definitely the primary cause, but government spending only increased the stagflation effects.

Oh, sorry.

Originally posted by Tingkai
I did not mean to imply that he said monetary policy was superior to fiscal policy. My take on Keynes was that he was not an ideologue. He would apply one or the other, or a combination, depending on the situation.

True, he wasn't an ideologue, but for example he didn't even predict stagflation. He thought fiscal policy would always stimulate the economy, or at least he never mentioned when it wouldn't.

[Mr. Harley]

I find I'm agreeing with Imran here, for multiple reasons. However, rather than rehash what's already been stated, let me add an additional negative to our huge deficits - United States trade, and to a certain extent other foreign policies, are hostage to foreign governments.

Both Japan and China have somewherer around 100 billion each in US treasuries. If they sold these, they could essentially create a run on the dollar. Therefor the US cannot afford to force them to respect intellectual property rights (China), or free trade (both countries intervening to keep the dollar stronger).

Now admittedly, this means that US consumers get goods cheaper than they should, as the Japanese and Chinese intervention in the foreign currency markets keeps the dollar higher. However, this also costs the US jobs (anybody read the news recently) and that has become an even bigger issue.

Add in to this the fact that the supply-side/Laffer types missed something I've mentioned once before. We are in a GLOBAL economy. The export of white collar jobs, now that India is getting a goodly portion of it's legal system straightened out, is exactly what the Laffer curve predicts. Exporting jobs to India increases the return on the dollar, more than investing in the US economy, and is being seen as almost as safe.

I would further suggest a 1% surcharge, increasing 1% per month, as a penalty for any country that runs a trade surplus with the United States. If you look at the structural impediments the EU, Japan, and China put up to US goods, you would realize that this is the only way to deal with that issue. You might even be able to keep WTO, though I doubt it, by raising certain provisions about national interests. Plus we could pull out, it's not doing American workers any good. I would rather pay more for US produced goods and give my neighbor a job than continue to engage in not-so-free trade (Japanese and Chinese monetary intervention, European government supported high tech/manufacturing including Eurocopter and Airbus) that is gutting US jobs.