Federal deficit spending vs out gap ：The fact that this is being

http://symmetrycapital.net/index.php/blog/2010/08/mosler-vs-stockman-ii/

Mosler vs Stockman II
Warren Mosler takes on another missive from former OMB chief David Stockman (Stockman’s quotes are italicized):

The Federal Debt Freight Train Is Coming at Mr. Market
By David Stockman

Aug 6 — Nominal GDP has been growing at only $4 billion per month, while new Federal debt has been accumulating at around $100 billion per month.

Federal deficit spending adds income and savings of dollar denominated financial assets to the economy. The fact that this is being done and excess capacity and unemployment is still high shows the economy’s desire to save is even higher, and that additional deficit spending is needed to expedite a return to full employment.

Hence, my proposed full payroll tax (FICA) holiday.

…the desire to save (reducing debt ‘counts’ as savings) grown [sic] so quickly, due to the financial sector crisis that followed the fraudulent sub prime expansion.And [Stockman] doesn’t mention anything actually wrong with larger deficits, just continuously uses negative language regarding magnitudes and direction.

…the deficit is still not large enough to offset desires to save by not spending income, and inability and lack of desire of the private sector to go into debt.

One of the beauties of MMT is that it lends itself freely to policymaking on both the “left” and the “right”. As Mosler points out:

For a given size govt, the readily available federal response to get the private sector back to full employment is to cut taxes sufficiently so the private sector can resume sufficient spending out of income rather than via debt expansion.

Public sector expansion will also return us to full employment. It’s a political choice as to whether we want more government or not.

Mosler agrees that, without private sector credit expansion, Stockman’s pessimistic outlook for GDP is likely to prove accurate. We would point out to Mosler that both financial and demographic data (e.g., Richard Koo and Diane Macunovich, respectively) seem to imply that private sector credit expansion will be flat for some time, perhaps up to a decade or more. In turn, that implies that the primary drivers of economic growth and incomes in the coming decade — without which private sector saving and balance sheet repair is impossible — will be exports and the federal government. Today’s export numbers for June put the burden even more squarely on federal government spending.

…we have baked into the cake a rather frightening scenario: monthly federal debt growth of upwards of $125 billion, or 3x the likely nominal GDP growth of $40 billion — as far as the eye can see.

The deficit isn’t frightening, it’s the continuing output gap that’s frightening and screams for a larger deficit- tax cut or spending increase, depending on one’s politics.

The real problem is this type of fear mongering from Stockman is what prevents the prosperity that’s at hand from happening.

Fourth, the publicly held federal debt will be about $9 trillion at the September fiscal year end, and at the built-in 3x GDP growth rate will reach $12 trillion when the next president is sworn in in January 2013. Adding in state and local debt, we’d be at $15 trillion or a Greek-scale 100% of GDP before the next president picks his or her cabinet. Every reason of prudence says not to tempt the financial gods of the global bond and currency markets with this freight-train scenario: Do something big to close the deficit, and do it now.

Now he brings in the Greek fear mongering.

By acting as if we could be the next Greece, we are well on the road to being the next Japan.

Greece is not the issuer of its own currency, but is analogous to a US state like California. There is no solvency issue for governments that are the issuer of their currency, like the US, UK, and Japan.

Fifth, there’s no possibility in either this world or the next of obtaining the needed $700-$1,000 billion structural deficit reduction by spending cuts alone. We’ve had a rolling referendum since the first Reagan budget plan in 1981, and progressively over these three decades the Republican party has exempted every material component of the budget from cuts, including middle-class entitlements, defense, veterans, education, housing, farm subsidies, and even Amtrack! Like Casey, the GOP has been in the anti-spending batter’s box for 30 years, and has never stopped whiffing the ball. The final proof is that the one GOP spending cut plan with any integrity — the “roadmap” of Congressman Paul Ryan — has the grand sum of 13 co-sponsors, and I dare say half would call in sick if it ever came to a vote. Therefore, tax increases are now needed because it’s too late and too urgent for anything else.

Again, implying there is some benefit to deficit reduction when there is excess capacity and unemployment as far as the eye can see.

…reducing private sector debt (including non residents) is done by the private sector spending less than its income, which can only be accomplished if the public sector spends more than its income.

Finally, in the context of a secular debt deflation, the overwhelming priority is public-sector solvency, not conventional growth.

Notice he has not made the case that there is a solvency issue. It just ‘goes without saying’ when in fact there can be no solvency issue for a govt that issues its own currency.

We’d go even farther on that last point — Stockman’s prescription for public finances (at the federal level, anyways) under deflationary conditions makes absolutely no sense whatsoever — not under modern monetary systems, and not under gold or commodity based systems. The last thing the public sector should do when there’s a shortage of money is to compete more intensively with the private sector for it! His lifelong anxiety over public deficits and debt sometimes borders on religious fanaticism.

Stockman goes on to point out that the “corporate cash on the sidelines” meme is faulty, and he’s right. But his solution is for all sectors of the economy to engage in concerted balance sheet repair, a/k/a “fiscal consolidation”, at once. But as Mosler points out:

…’savings’ for the economy as a whole (not including govt) has gone up by exactly the amount of the deficit, or someone in the CBO has to stay late and find his math error.

This is a key aspect of the intersectoral balances approach. Under today’s monetary system, money is created directly by the Treasury and Federal Reserve, not indirectly via gold mining and the U.S. Mint. And there is nothing in the economic data — even when you account for the expansion of the Fed’s balance sheet — that indicates a surplus of dollars in the U.S. economy. Though we arguably haven’t seen it since the 1930s, we’re in the midst of a Keynesian moment. Pessimism abounds, the paradox of thrift is in full effect, and both tax hikes (Dems) and spending cuts (GOP) are likely to make the problem worse.

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