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Soubresaut's avatar

"The government's red ink is our black ink, and their deficit is our surplus" -- what say you?

Asked by Soubresaut (12660points) 3 months ago

Suppose the government spends $100 into the economy, but it only taxes $90 back out. We label that a government deficit. So somewhere, somebody scratches down on a ledger: ”-$10 for the government.” You’re in deficit. . . We say, “Shame on you! That is very bad that you did that.” But we completely miss the fact that somewhere in the economy there’s 10 bucks out there that wouldn’t have been there if the government had balanced its budget. The government’s red ink is our black ink, and their deficit is our surplus. This is just by accounting definition. So every time someone talks about the need to “reign in the deficit,” or “balance the budget,” what they’re really saying is their goal is to shrink the private sector’s surplus. And I think if people understood it in those terms they’d be a whole lot less enthusiastic about running around and trying to shrink budget deficits, and so forth.

The above was said by Stephanie Kelton, economist at Stony Brook University. It was just one perspective on a podcast episode surveying different perspectives on the economy and the budget deficit. It caught my ear simply because it’s different from what I’ve heard before, and so I wanted to ask for your responses, reactions, analysis, and perspectives on it.

(Please try not to simply say “I agree” or “I disagree,” or “it’s good” or “it’s bad.” Instead try to explain why your perspective is what it is. That’s really what I’m curious about, not so much how you’d simply grade the above statement.)

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10 Answers

zenvelo's avatar

This is a simplistic yet real explanation of the effect of government spending on the economy. In a nutshell, it explains why a deficit hawk congressman will fight to have a military base or a defense manufacturer in their district.

And one other factor not included is that if the government spends $100 but only takes at 25%, the velocity of money through the economy means the $100 gets taxed multiple times.

The statement does leave out the cost of borrowing cash to make the initial outlay. But that cost is manageable if the deficit as a percent of the economy is held at a reasonable level.

notnotnotnot's avatar

Related article by Stephanie Kelton. She was also on Citations Needed.

elbanditoroso's avatar

Overly simplistic, with an incredibly poor understanding of economic cycles, depression, world events, etc.

And even if you discount economic cycles (which you shouldn’t) , her assertion is still simplistic because government is constitutionally required to provide services to the population, whether she like it or not.

I can see why this sounds popular to the anti-government right, but the assertion is built on a very flaky understanding.

gorillapaws's avatar

This is misleading. It really depends on how that $10 is spent. If it’s given to a billionaire who is putting it towards his yacht in the Caymans, then it actually hurts the economy, because the billionaire has to sell dollars to buy Cayman Island Dollars which drives down the value of the Dollar and raises the value of the Cayman Island Dollar. That money is now stimulating the Cayman Island’s economy.

If instead the government had invested that money in someone’s education, and that person who would have been earning $40k/year will now be earning $80k/year and generating tax revenue that will yield back in taxes many times the initial investment.

flutherother's avatar

As I understand it running a budget deficit means you borrow money which you will have to pay back. This is OK if you don’t borrow too much and it is OK while GNP is increasing at a healthy rate as your repayments will be easier to make.

Giving large tax breaks to the well-off, as is presently happening in the US, means less money is available for public benefit and either cuts must be made or money must be borrowed to make up the shortfall. The government’s red ink is specifically their black ink. The money borrowed must be repaid from taxes and it is the lower earners who will be asked to cough up. It is taking from the poor to give to the rich.

seawulf575's avatar

I agree with @gorillapaws. Deficit that is used to line the pockets of the government or cronies isn’t a benefit. And every dollar of deficit goes right into debt which still has to be paid by taxpayers. So it really isn’t helping, it is hurting since that same $10 in deficit now is accumulating interest that also has to be paid. The statement provided is a huge oversimplification that is designed to justify ridiculous deficit spending. We all do deficit spending…all of us. If we put something on a credit card or take out a loan, we are using deficit spending…we are spending money we don’t have. And we accumulate debt. That debt has to be paid. Sometimes the deficit spending is beneficial…buying a home or a car, doing emergency repairs to said car or home, maybe even buying a wedding ring for that special person. But our government has shown that (a) they don’t understand the concept of a budget, (b) can’t abide by a budget they design, and© don’t have a problem selling national debt for political gain. That, to me, isn’t fiscal responsibility and doesn’t meet the criteria of being beneficial.

YARNLADY's avatar

Not really. Let’s say I buy a great big, beautiful house with all the latest amenities, but I don’t actually pay for it. I borrow the money and my income only covers the interest payments.
Now my children have a wonderful place to grow up in, and when the grandchildren come along, they love “Grandma’s” house. Then I die, and they find out they don’t own anything. There is a huge debt, and everything they thought they had is repossessed. That is deficit spending.

Soubresaut's avatar

Thanks, everyone. GA all. Sorry to only be responding with a delay. The last few days got suddenly busier for me than I was anticipating so I wasn’t able to respond the way I wanted to. (Also, as I’m sure the responses and questions I ask below will make perfectly clear, economics is certainly not a strength of mine, so it took some time to put together responses.) Apologies if I’ve clearly misunderstood a concept—and if you have the time to re-explain it to me, thank you in advance!

Also, if anyone reads this, don’t feel like only the jelly I made a comment or question to can respond (not sure that anyone feels this way, just wanted to say so to make sure).

@zenvelo—how do we know the threshold for what makes a deficit’s percent-of-economy reasonable or too much? Also, not sure if you can answer this, but does fighting for the military base or defense manufacturer mean the deficit hawk congressman essentially agrees with Kelton? And if so, are their being disingenuous when they say their opposition to government spending in other sectors is about the budget deficit, or do think they see some critical difference in military spending?

@notnotnotnot—thanks for the sources. I’ve read the article, haven’t had a chance to listen to the podcast yet. If I’m understanding it (I want to check that I am): Kelton’s saying that the government can get money in three ways: taxes, bonds, and creating new money. And that because of this, the limit on government spending is the economy’s ability to meet demand, not the government’s ability to pay. She also seems to be talking not about the government simply putting money into the economy for it to go wherever it does, but about the government spending that money in ways that produce social value/that benefit citizens (college tuition and healthcare as her main examples). Is that a fair understanding, or would you adjust it?

She also says that to “make these policies work, all we have to do is produce enough hospitals, doctors, nurses, universities and teachers,” which made me realize we probably don’t have enough of those people or places to accommodate everyone right now. Do you know, or know how to find out, how much of an increase in doctors, nurses, teachers, hospitals and universities we’d need? I know that sudden large-scale hiring waves tend to lower the average skill of workers in a given field, or can lead to hiring people who are ill-suited to the field. Add to that the additional schooling (time) required of doctors, nurses, and teachers to hone their respective skills… What do you think it would take for us to get to “enough hospitals, doctors, nurses, universities and teachers” (of sufficient quality)? (It might be that we’re there already, I really don’t know.) And how does a government make sure that it isn’t pushing the economy beyond its ability to meet demand?

@elbanditoroso—could you be more specific in how you think it’s a poor understanding of those economic concepts?

Kelton, specifically, does support having the government provide services to the population. But I do find it really interesting that the above statement I transcribed, when presented with little external context, can read as supporting the ideas of anti-government advocates as well. I think I see what you’re getting at there, with the budget deficit coming through means like cutting out sources of government revenue (and subsequently cutting government services) with the argument that it means more money in the private sector?

@gorillapaws—I think you’ve shown a significant limitation to the scenario’s explanatory ability. When I heard $10 more somewhere in the economy, it sounded like a vague net positive. But your examples illustrate how the value of that $10 isn’t the same wherever it winds up, not by a long shot. Do you think the scenario can still be useful to counter a knee-jerk aversion to the concept of a government having a budget deficit, to be followed up with examples like yours, or do you think it can be too easily used to justify the $10 going to whoever (“somewhere in the economy”), with that whoever being someone like the billionaire buying Cayman Island Dollars?

@flutherother—another significant limitation to the scenario. How the scenario can make it seem like -$10 government deficit is a de facto positive for the private sector, never mind how that deficit is achieved. And if that’s the case, then we could have that same deficit by cutting both taxes and government spending—make it, say, $90 spent by government, $80 taxed back out—and now “less money is available for public benefit.” It looks the same if we’re just looking at the deficit marked in the ledger, but that’s only one factor of many to account for. (Plus, as you pointed out, the tax breaks in the US are going predominantly to the wealthiest.) Is that a fair understanding of your point?

Is focus on budget deficit a kind of a red herring in economic discussions? That what the disagreement is actually about is two different models of government budget deficit? I’ll try to explain what I mean. (1) In one, the government makes investments to provide new or different services to the public, creating a budget deficit as it increases its own spending in specific sectors. In doing so, it seems like it increases the overall total “value” of the economy, by literally increasing the total amount of money that is passing from hand to hand. (2) In the other, the government reduces its intake of revenue (like through cutting taxes), while either maintaining or shrinking its own budget. In doing so, it seems like it redistributes the current total “value” of the economy so that less is being sent to, and spent by, the government. (But since the government spends money into the economy, and since it pays employees that spend money into the economy… this isn’t really increasing the value of the economy, is it? At least not directly. Instead it’s hoping that by pushing more money out into the rest of the economy, private citizens will make investments that will grow the economy?)

I think I’ve gotten away from your actual post…

@seawulf575—could you define what you see as “ridiculous deficit spending” for me? Is it about a pure dollar amount? About how much is spent versus the expected value to be seen from the investment (and how would you measure that value)? About the types of services or sectors where the government spends money, where some are good uses of government funds, and others not? Or something else?

@YARNLADY—in this alternative example, could you lay out for me how the house being repossessed map back to the government and the economy? And I guess, too, what the “house” is in terms of government spending. (Just wanting to make sure I understand.)

Where I live, housing prices continue to rise, so that if someone is able to purchase a house and hold onto it, there is a good bet that the house at a future point will be worth much more than the remaining mortgage (or initial purchase price). Of course, there are periods of time where housing prices fall, too, and this backfires; and it’s also dependent on how long the person can hold onto the house as its value grows. So if your scenario played out where I live, the grandchildren would be able to sell the house for many times what the grandma’s original mortgage was, paying off the debt and splitting the remaining funds between themselves. They wouldn’t be able to keep grandma’s house and its more intimate value, true, but they wouldn’t be left with nothing, either. (And if there had been a housing market crash, then they might very well be stuck with the debt.) But I’m not sure how that fits into your analogy for the government and deficit spending (or if it’s a way in which the analogy doesn’t hold)?

seawulf575's avatar

@Soubresaut I find deficit spending is irresponsible…period. The only reason I could see for doing it would be if you had some emergent action that needed attention…Hurricane Katrina for example. Other than that, what deficit spending says is that you have a budget and have no intention of following it. I have a real hard spot with how our government spends money. They NEVER actually review what they are spending money on, never look for ways to consolidate or economize…actually most of our elected readers have no idea what we have in our budget. Fiscal responsibility would be to evaluate what the money is being spent on before agreeing to spend more. Example: If I said I had $500 a month to spend on food at the grocery store, but then decided that eating out half the time was okay and never went back to amend my budget, I would spend $500 at the grocery store while I spent probably the same or more on eating out. My budget didn’t account for eating out so I just spent money I didn’t have. I also didn’t try to offset it with the money in my food budget. It’s irresponsible. That’s what our government does. The other thing they do that is idiotic is to pay way too much for things because they don’t feel the fiscal responsibility. Again…I equate this to something like me determining that I wanted to buy a new TV. I go to Walmart and find a nice one for $700. But instead I go to Rent-a-Center and rent-to-buy the exact same TV for $50/month for 24 months…$1200 for the same TV. If we have a budget, we need to stick to it. Our leaders are into deficit spending by February of every year. If they are planning to spend more than they budget, they need to assure that there is something to be gained by it. It never happens. They equate political power with actual value to the American public. It isn’t. Please note I’m not identifying entitlements or military spending differently. I find them all to be poorly controlled. There are departments that are duplicating each other on entitlements, but none of our elected leaders identify that and refuse to try to consolidate. The Military wastes money on overpriced equipment and corrupt contractors. But again…there is no controls in place so it continues on. Take a look at almost anything our federal government spends money on and you can easily find some way to make it better, more efficient, lest costly, or less redundant.

YARNLADY's avatar

What I am saying is deficit spending means spending money you expect to earn in the future, and passing the debt on to future generations. The government offers various promises to pay later in exchange for borrowing money now, and the debt just keeps getting bigger and bigger.

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