Re: Federal Budget Deficit Expected to Reach Over $300 Billion

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

William F Hummel wrote:
> The effect of deficit spending depends on whether it occurs (1)
> because of a reduction in taxes, or (2) because of increased
> spending without an increase in taxes.  It also depends on the
> state of the economy, especially the employment level.  At full
> employment, deficit spending cannot stimulate the economy, and is
> likely to be inflationary.  I'll ignore the full employment case
> here.
Deficit spending is really a simple matter.  It means the government spends
more than it collects during a given fiscal year.  Now government revenue
rises or falls according to the performance of the economy even without changes
in the tax rate or the tax base.  Thus tax cuts by themselves may or may
not produce surpluses or deficits, the Laffer Curves not withstanding, because
the performance of the economy is subject to many other factors besides taxes.
 Government surplus removes money from the economy and government deficit
injects money in the economy.  The size of the money supply is important
to the size of the economy.  Generally speaking, the larger the better, if
a growing economy is the aim.  How the inject money is spend is a separate
issue - mostly an efficiency issue.  Injecting government money will not
work to keep a debt bubble from collapsing, as a decade of empirical data
in Japan has shown.  It works only if the economy suffers from a conventional
business cycle not excessive affected by debt.  Even under full employment,
deficit financing can be useful to prevent on-coming unemployment.  Fear
of inflation from full employment is purely an ideological mental block.
 Full employment deficit financing needs not cause inflation since wages
can still go up to neutralize inflationary effrects, particularly under overcapacity
situations.  
> Deficit spending increases the net financial wealth of the public
> by the net sale of Treasury securities covering the deficit.
> People are likely to spend more when they hold government
> securities than when all they have is receipts for payment of
> taxes.  However the wealth effect itself is not much of a near
> term stimulus.  There must also be a need to spend.

It is misleading to view the issuing of Treasuries (sovereign debt) as deficit
financing.  By issuing debt with deficit spending, it becomes a wash. What
the government spends (injecting money), the governments take back in loans
(withdrawing moeny).  Al that does is to take money from the economy and
let government spend it, without enlarging the money supply. True deficit
spending must be financed by printing money, enlarging the money supply.
 And to be effective, it needs to be done so that the new addditional money
will not be saved or used to pay down debt, but be distributed to those who
will immediately spend it. To work, a tax on saving needs to be considered,
which means raising the capital gain rate.
> The demand side is almost always the problem.  The key to
> providing a near term stimulus then is to increase the purchasing
> power of those who need to spend, or at least have a strong
> desire to.  Ultimately there must be increased hiring to provide
> the income needed.  There is no shortage of funds available for
> business expansion, but there must be sufficient demand to
> encourage that investment.

Demand is only a problem if the value on money becomes more important than
the health of the economy or the welfare of humans.  Otherwise, there is
no problem. The most problematic word is "ultimately".  Ultimately, all is
lost, because people begin to die after three days without food.  The aim
must be immediate and direct. 
> The main difference between two cases above are where the
> benefits occur.  The benefits of a tax reduction will end up
> primarily in the hands of those less likely to spend the funds,
> at least in the near term.  The benefits of a spending increase
> will go primarily to those who will spend when funds are
> available.  In both cases, the funds to cover the deficit come
> from the investment of individuals or firms with an ample supply
> of loanable funds.
>
> William F Hummel

Tax reduction may cause deficits, but it is not deficit financing, much less
deficit spending.  The Bush tax cut is coupled with REDUCED government spending
while anticipating a budget deficit.

Henry C.K. Liu
> > A question:
> >
> > It is assumed that deficits are stimulative. But is it the case that they
> > are _inherently_ stimulative, or are they stimulative primarily when the
> > deficit is the result of increased government spending, and not just because
> > of a reduction in revenue? If they are inherently stimulative, can anyone
> > explain how that works?
> >
> > Thanks
> >
> > Stephen Block
> >
> >
> >
> >