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

[William F Hummel <wfhummel@xxxxxxxxx>]

Henry Liu wrote:

>Deficit spending is really a simple matter.  It means the government
>spends more than it collects during a given fiscal year.

Specifically deficit spending means spending more than tax
revenues received during a given fiscal year.  The Treasury
balances its books by collecting in taxes and bond sales exactly
what it spends, on average.  Any difference forces the central
bank to add or drain banking system reserves in order to maintain
control of the interbank lending rate.

>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.

Neither a government surplus nor a deficit affects the amount of
money in the economy.  What is affected is the amount of Treasury
securities outstanding.  Money is spendable, securities are only
tradeable.  One buys goods and services with money, but not
securities.

>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.
>
If wages increase at full employment (implying no additional
output is possible), the effect will almost inevitably cause a
general increase in prices.
>>
>It is misleading to view the issuing of Treasuries (sovereign debt) as
>deficit financing.

You can't have one without the other.

>By issuing debt with deficit spending, it becomes a
>wash. What the government spends (injecting money), the governments take
>back in loans (withdrawing moeny).  All that does is to take money from
>the economy and let government spend it, without enlarging the money
>supply.

The government cannot enlarge the money supply on its own
initiative without literally printing it and spending it.  The
money supply increases as a function of demand for bank loans and
the willingness of banks to lend, and the demand for increased
holding of currency.  The "money supply" comprises the
liabilities of banks plus currency in circulation.

>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 literal printing of money to spend is never done in a healthy
monetary system.  That is done only in hopelessly sick economies
or corrupt political systems.  As noted above, the money supply
grows as a function of demand from the private sector, not
through direct injection by the government.
>>
>>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.

 In a free enterprise market economy, the private sector is the
principal source of jobs and economic growth.  Increasing
effective demand is the key to stimulating private enterprise to
increase production, jobs, and thus income.  The most direct way
to increase spendable income is through government spending, but
that will not work indefinitely short of some sort of incomes
policy.

William F Hummel