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Mad Deficit Disease strikes down Larry Summers!

Marshall Auerback spots another deficit downer! Larry Summers:

Summers reflects the usual deficit dove position that budget deficits are fine as long as you wind them back over the cycle (and offset them with surpluses to average out to zero) and keep the debt ratio in line with the ratio of the real interest rate to output growth. In so doing, he violates one of Abba Lerner’s key laws of functional finance: a government’s spending and borrowing should be conducted “with an eye only to the results of these actions on the economy, and not to any established traditional doctrine about what is sound and what is unsound.” In other words, Lerner believed that the very idea of what good fiscal policy means boils down to what results you can get* — not some arbitrary notion of “fiscal sustainability”. ...

Deficit cutting, whether now or in the future, is not a legitimate goal of public policy for a sovereign nation. Deficits are (mostly) endogenously** determined by the performance of the economy. They add to private sector income and to net financial wealth and, in any case, decisions by the non-government sector to increase its saving will reduce aggregate demand and the multiplier effects will reduce GDP. If nothing else happens to offset that development, then the automatic stabilizers will increase the budget deficit (or reduce the budget surplus). ...

Of course, an article from Larry Summers wouldn’t be complete if he didn’t repeat the usual claims of virtually all the Clintonistas – namely, that reducing budget deficits and running 4 consecutive years of budget surpluses contributed to enhanced economic performance. ...

No, it didn’t. The government budget surplus meant by [accounting] identity that the private sector was running a deficit. Households and firms were going ever farther into debt, and they were losing their net wealth of government bonds. Growth was a product of a private debt bubble, which in turn fuelled a stock market and real estate bubble, the collapse of which has created the foundations for today’s troubles.** This destructive fiscal policy eventually caused a recession because the private sector became too indebted and thus cut back spending. In fact, the economy went into recession within half a year after Clinton left office. ...

Fiscal hawks and deficit doves alike are strangling the baby in the crib today by denying a sensible fiscal response for the current generation’s plight, while hyperventilating that fiscal deficits will do the strangulation of the next generation tomorrow. That, in a nutshell, is what is truly sapping our long term economic vitality. The only way to avoid this ongoing plight is to champion a return to full employment policies, and stop being enslaved by the economic shibboleths which people like Larry Summers and his ilk continue to champion recklessly.

Ding! Massive takedown. What pure pleasure. Too bad about the collateral damage with the Clintonistas, but I'm thinking he's right. Surrendering allegiance to legacy party narratives keeps the analytical tools sharp, doesn't it?

NOTE * "The results you can get" depend on where you sit, though, eh? Summers is doing quite well for his owners, the banksters.

NOTE ** On the plus side, at least with the Clintons everything wasn't immediately creamed off by the elite; distribution was better. House of sand, and all that, but concrete material benefits do matter. Too bad The Big O either doesn't believe that, or does, and doesn't care.

NOTE *** WTF, MMTers. You know I love ya, but can we please think of a better word than endogenous?! I mean, I'm peddling along, speeding along, enjoying the fresh air, the exercise, the view, and the polemic, when all of a sudden I'm flying through the air and into the ditch of not getting it, and because I struck the stone of a single 75-cent word: "endogenous." And I'm literate enough to get the joke in the headline! Shake the chalk dust off your sleeves, people! And while you're at it, stop referring to actual humans as resources, mkay? You'll never get elected if people think you're from the HR office! People hate HR!

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letsgetitdone's picture
Submitted by letsgetitdone on

myself. But looking at the context:

Deficits are (mostly) endogenously** determined by the performance of the economy. They add to private sector income and to net financial wealth and, in any case, decisions by the non-government sector to increase its saving will reduce aggregate demand and the multiplier effects will reduce GDP. If nothing else happens to offset that development, then the automatic stabilizers will increase the budget deficit (or reduce the budget surplus).

is anything lost by substituting:

Deficits are (mostly) determined by the performance of the economy coupled with the effects of its automatic stabilizers. Government deficits add to private sector income and to net financial wealth and, in any case, decisions by the non-government sector to increase its saving will reduce aggregate demand and the multiplier effects will reduce GDP. If nothing else happens to offset that development, then the automatic stabilizers will increase the budget deficit (or reduce the budget surplus).

???

Submitted by lambert on

I think it's a matter of sharpening the discourse.

I think the idea of automatic stabilizers is important and lost in "endogenous" (roceeding from within. Huh?). The idea of the feedback loop -- which is politically, or rather electorally, determined -- is lost in the jargon. In fact, feedback loops are common in every day life (thermostats) and there ought to be a way to explain that in a one or two word phrase....

I don't think anything's lost in our translation; it's more clear.