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If the road to hell is paved with good intentions, then the road political progressives are on may be very well paved, but it’s still heading in the wrong direction.
Prof. Stephanie Kelton explains why in her response to CPC Co-Chair Representative Keith Ellison:
Maddening! The Clinton surpluses were driven by the dot.com bubble and unsustainable private sector deficits. When the bubble burst, stocks crashed, the economy went into recession, and the surplus quickly reversed itself. It was only AFTER the government’s budget moved sharply into deficit that the private sector was able to get out of the red. All of this would happened even without 9/11, the wars in Iraq and Afghanistan, the subprime crisis, etc. We cannot keep relying on asset bubbles (stocks, housing, whatever) to drive economic growth.
The simple fact is this: A GOVERNMENT SURPLUS IMPLIES A DEFICIT IN THE PRIVATE SECTOR. And the private sector, unlike the public sector, cannot survive when it’s running a deficit. Anyone who does not recognize this simple fact (intuitively or empirically) should not offer commentary on matters of such significance.
Government Deficits allow the private sector to net save financial assets. Balance the budget, and the private sector loses financial assets. Run a government surplus, and you drive the private sector into deficit.
Someone in Washington better figure this out pretty damn quick, or our children and grandchildren are going to be burdened like never before.
The Ph.D. Economists who blog here understand:
Excerpts from This Is Our Moment by Representative Keith Ellison:
America has an historic opportunity. We have the chance to address our budget deficit in a manner not seen since President Bill Clinton created a budget surplus in 1999. And if we do it right, we could pave the way for a vibrant American economy based not on gimmicks like giveaways for special interests, but on job creation for working Americans. As co-chair of the Congressional Progressive Caucus, I urge us to avoid a default on the faith and credit of the United States while protecting Medicare, Medicaid and Social Security.
The Congressional Progressive Caucus stands with the American people. Long before Republicans took our economy hostage, we introduced the People’s Budget, the most fiscally responsible deficit plan introduced this year. The People’s Budget would eliminate the deficit in 10 years. Economists across the political spectrum have called it courageous and responsible. Introducing this budget was one of my proudest moments as a Member of Congress, because it shows the power of Progressive policies and values. Creating an economy that reduces deficits and creates jobs is a progressive value, not just a slogan as it is for the Tea Party.
As the People’s Budget has proposed, and the president has affirmed, our solution must reflect the same values that have motivated us historically. We believe in a fiscally healthy America because it leads to an economically healthy America. A balanced budget is critical precisely because it allows us to maintain the services that the middle class depends on. Any deficit deal that takes money away from seniors and American workers who rely on Social Security, Medicare, or Medicaid undermines the original goal of deficit reduction. Any deficit deal that cuts food stamps but pampers the wealthy is not only bad for the most vulnerable Americans, but damages our fiscal health.
See Warren Mosler for more: Kelton responds to the Progressive Caucus Co-chair
34 Comments
the CPC budget isn’t progressive. time to go back to the drawing board. here are a couple of links to help Representative Keith Ellison:
L. Randall Wray: A PROGRESSIVE APPROACH TO FEDERAL BUDGETING
Warren Mosler: Modern Monetary Theory: The Last Progressive Left Standing
Policy decisions are money decisions – and the money decisions in the progressive budget meets my definition for progressive.
As to a surplus causing a recession, that is IMO a faith based assertion as to transactions and balance sheet items from an accounting identity equation that no one questions. As to the economy following the stock market, anyone with experience on Wall Street would tell Prof Kelton that the history of stock market major moves is that they do not correlate well with future economic recession or expansion increases. Surplus certainly is a negative “stimulus” – but the economy grew after the NASdaq crashed – and the S&P and Dow did not crash at that point. The portion of National Income that is private savings is not the only thing that goes into moving wealth higher, or lower, as the housing collapse demonstrates.
I did not see a discussion of the CPC budget at your link. And being in tax in the 90′s I feel fairly confident in stating tax revenue growth under Clinton came from tax law enforcement – not from some minor bubble that was a minuscule part of the economy (albeit a notable part of the Nasdaq rise).
This kind of assertion does not sell MMT – and MMT needs to be sold because it some good perspectives in it IMO.
I should have noted that Clinton tax revenues benefited from the capital gains coming from the rising economy causing a rising stock market.
I don’t see how we can ever return to growth in a consumer economy when wages are falling. Wage growth has been flat for the last 40yrs and growth was sustained for the last 20yrs by tapping equity from homes and easy credit. Both of those are gone never to return.
Isn’t it something…a so called progressive congressman ,chair of the pact to boot urging for the Clinton era economics….sigh.
Yes up is now down folks.
Wonder really how progressive congressman Ellison is ?
from stephanie kelton’s comment:
it’s not that govt sector surpluses cause recessions, it’s that the private sector deficit — implied by the govt sector surplus — that “cannot survive.”
there is more on this in the link to l. randall wray’s progressive budget post.
the CPC budget calls for a govt surplus. that makes it an austerity budget.
here’s a great comment from scarecrow on that:
yeah, falling wages and unemployment are signs the economy is not “working.”
we need a new “new deal”.
maybe congressman ellison just doesn’t know any better? no reason he should… he’s probably been the target of far more propaganda than we have.
up to us “the people” to let him know what we think.
p.s. please see my recent letter to my congressman:
http://my.firedoglake.com/selise/2011/07/19/dear-representative-mcgovern/
Progressive is a brand that’s been a total flop. It was the New Coke of Liberalism.
What we need is a Liberal Classic Caucus. What we need is a Liberal Classic Party. What we need are people proud to speak of FDR, Truman, JFK, LBJ, Bobby, MLK, — you know back when we had heroes. I mean could you think of ONE hero today in the Democratic Party?
Reset. Reboot. Start Over.
Falling wages and dis- and long term unemployment are part and parcel of the Obama et al economic plan: Which is the Republican Cheap Labor dream.
Obama is reported to believe US wages must drop by 30% to make the US more competitive globally.
He also seems to be firmly in the camp that sees a small Uber-wealthy class atop a huge number of barely making it people with low wages as the way to run a nation.
not in the party leadership. but in the party itself? sure. and there are lots more that get zero coverage by establishment media (including progressive blogs).
for a start, check this one out:
James K. Galbraith: We Need to Make an Honorable Fight… the Fate of the Entire Country is at Stake
thanks jawbone. here’s a working link to michael hudson transcript:
http://michael-hudson.com/2011/07/the-euthanasia-of-industry/
selise ~ I really try to follow all these economic discussions, without great success, my brain is feeling very small these days. However, I appreciate the exposure to voices like Hudson and Mosler. I find both to be authentic and trustworthy. All this is progress for me as an individual example.
I don’t know if it’s the clarity of the quote at the top of this diary or some tipping point but I just had a breakthrough. I do now intuitively understand the connections between private and public deficits and surpluses and recession!!!!
It’s like this MMT stuff is coming at the whole big picture from another angle. Pulling on a different thread than the traditional narrative uses.
So, just to let you know. I can’t be any exception. If this is happening for me, over time, it must be happening for others who merely take the trouble to try to follow along without being able to read and understand it all …
Do carry on!
Yes the CPC budget calls for surplus – and we disagree as to the effect that would have other than not being stimulus, and indeed we agree the lack of stimulus would slow down growth. But there is a concept of “sustainable growth” – that sweet spot the Clinton managed, by luck or skill, to hit.
I don;t see the “drain” – and MMT shows no drain – it only shows that new private savings from income are reduced and indeed made negative. Private Wealth creation can still continue in that scenario.
Just a tip of me hat, selise, to the wonderful job of presenting the opportunity of learning to so many of us, so consistently and well.
I do take, most seriously, your suggesstion that many in positions of “governance” have not been exposed to the possibility of an expanded horizon of awareness and comprehension beyond the flat-earth economic perspective. Your linked letter was superlative and your patience inspiring, as always.
So, you know what I say … keep on, keepin’ on.
Lead on, selise, the number of human beings following your journeys of understanding and discovery is growing ever more rapidly.
Recommended.
DW
I don’t agree that the problem had anything to do with the way the government handled taxes. There was too much capital floating around in the system, being used to inflate bubbles. Think how much worse it would have been if the government had been running deficits and financing the bubble.
That is exactly what happened in the run-up to the Great Crash. There was so much loose capital floating around looking for 10% returns in AAA rated securities that it was easy for the cheats and frauds to sell them manufactured crap. If the government had been collecting the excess in taxes, the bubble would have been much smaller, and the financial elites would have had drastically less power.
Even when the crash came, the magic debt number that only matters when Democrats are in power would have been massively lower, the amount of stimulus needed would have been lower, and the deficit hawks would have nothing to work with.
I realize this is Keynesian thinking, but I do not think it conflicts with what little I understand of MMT.
To clarify, I should have started by saying that I do not think the recession of the early 2000s had anything to do with Clinton-era taxes.
Excellent, selise. Thank you.
Bill
Keith Ellison is my Congressman. In fact in the last selection, I rann against him, from the left.
He refused to participate in any debates that I was invited. Plain simple fact.
Not because he did not have to but because he knew that I knew what he was really doing, instead of the image he (and the money that owns him) has created.
There are so many issues that is relevant on his long list of betrayals that it boggles the mind.
In fact here is one little relevant fact. Keith Ellison is the very first Muslim selected to Congress. Yet I was endorsed by NAMWA National Association Muslim Women of America.
That is an indicator from those who pay attention to what Keith does instead of what he says.
For the record folks.
Since I ran against Congressman Ellison and he refused to participate in any debates that I was invited to and when repeatedly asked to debate in public forums, I can testify to the progressive creds or lack thereof of Congressman Ellison.
This was all caught on you tube. Just search you tube michael cavlan keith ellison and you can watch it.
Sadly, so much of the progressive community in the Minnesota 5th District seemed to be OK with this lack of transparency.
Let us hope that the greater Minnesota area are not so inclined..
Think of the drain this way. You can balance the budget either by
raise taxes, which pulls money out of the private sector to pay those taxes. or
reduce govt spending, which reduces money going into the private sector
Either or both reduces the resources available to the private sector
The larger pont is sometimes called an accounting identy. Simplest, inexact form: The sum of x plus y minus z MUST equal zero. MUST! Its just math. So if z is held constant, and you raise x, then y must go down. It’s just math.
So if you force the fed spending to go down to balance the budget, but the trade balance doesn’t improve, then the private sector must take the hit. MUST! Thus, a forced march to balance the federal budget will drain the private sector as long as our exports are less than our imports (trade deficit). Oversimplified, but that’s the basic idea.
masaccio, stephanie kelton’s comment doesn’t say that the gov should have been running deficits during the bubble.
i don’t understand what it is you disagree with? it would help if you would quote from the the post and explain step by step specifically where your disagreement lies.
(have a couple more questions — will pose them in separate comments)
fabulous! imo kelton is a very clear writer — even when dashing off a quick comment, like this one.
moving from the conventional wisdom, it’s a massive, multi-faceted, paradigm change. and no, you’re not an exception (other than you are getting it!). there are very few real experts, the rest of us are working on it. :)
thanks DW!
i’ve got to start using your “the flat-earth economic perspective.” (i think scarecrow has used that one too).
from my pov, that simple phrase captures some of the paradigm / world view shifting involved.
thank YOU!
for the record, i called the congressman’s office to ask permission to post his full statement (it’s not very long and i thought it would be more fair to the congressman). but have a couple of emails, his communications director told me no, i’d have to use only the three key paragraphs. said they’d promised huffpo exclusivity — however, i’ve seen it posted other places, including the cpc website. so, can’t say i was particularly impressed with that little bit of interaction with his staff.
hope that wasn’t an indication of how the congressman works… and, more importantly, that congressman ellison will re-consider the appropriateness of calling for fed govt surpluses in a “progressive” budget proposal.
its just math!
haha. makes me laugh, thanks!
selise
you tube keith ellison refuses question on Bradley Manning
That little tape will tell you all you need to know.
Stop listening to what selected officials say and watch what they DO.
I will say it again and publicly so.
Congressman Keith Ellison is a fraud. Although to get to the real heart of the matter. The problem is not Keith Ellison but instead the people who own Keith Ellison and all the other Keith Ellisons in Congress.
lol, i’m guessing you don’t know me very well. :)
(have you ever see me put more stock in what they say over what they do?)
on this thread, i’m focusing on the economic issues involved and that there is no progressive justification for a fed govt budget that calls for a budget surplus.
Kelton:
????
edit to add:
masaccio, do you disagree with the bit you quoted? if so why?
and if not, what were you trying to say by quoting it?
re “keynesian thinking.” given the number of schools with very different kinds of economic thinking, all claiming the mantle of “keynesian thinking,” it’s hard to know what is meant by the phrase. in your case, do you mean “neoclassical synthesis keynesianism?” iirc, you wrote at some point that you studied macro with samuleson’s text book.
more re “keynesian thinking.”
masaccio, a while ago you made a comment:
is this what you mean by keynesian thinking? if so, could you please give me a source to read?
seems to me like the deficit dove position (which is quite different than mmt). in mmt paradigm, other than self imposed constraints, fed govt need not borrow in order to spend. from forstater’s simple explanation: “The purpose of bond sales is not to finance spending, but to drain excess reserves created by deficit spending. This is necessary to maintain positive short term interest rates.”
why should the fed govt hoard dollars (“store up corn”) when it is monopoly issuer of currency? fed govt doesn’t need to save dollars in order to spend them later.