Collective Conscious

They can cut what­ever pro­grams they want, but a basic account­ing iden­tity pre­vent the fed­eral bud­get from ever bal­anc­ing. Essen­tially, a given coun­try (say the US) can never have “net sav­ing” in the sense that it is just pil­ing money away some­where: in order for some­body to be sav­ing money (as bonds), some­body else has to be bor­row­ing money (also through bonds). If you divide the econ­omy into three sec­tors — pri­vate, pub­lic, and for­eign — you get the basic iden­tity that they all must sum to zero. Real­ity backs this up:

The big swing over the past few years has been the com­plete col­lapse in pri­vate bor­row­ing coin­cid­ing per­fectly with the reces­sion. As the iden­tity pre­dicted, gov­ern­ment bor­row­ing rose exactly to match the new net sav­ings under­taken by the pub­lic sec­tor (assum­ing the for­eign bal­ance — which is equiv­a­lent to the trade deficit — is exoge­nous and/​or sta­ble). The rule is gen­eral: as long as the pri­vate sec­tor is try­ing to save money rather than spend it, the gov­ern­ment will have to keep spending.

The iden­tity also makes the solu­tion to the deficit “prob­lem” quite obvi­ous. All we have to do is get busi­nesses spend­ing again rather than sav­ing, and the gov­ern­ment will find its fis­cal bur­den “mag­i­cally” lifted. The expla­na­tion is also fairly straight­for­ward. When busi­nesses are bor­row­ing and spend­ing, GDP rises, tax rev­enues rise, unem­ploy­ment falls… and so on, reliev­ing the gov­ern­ment of the need to take expen­sive mea­sures such as unem­ploy­ment relief and COBRA insurance.

The cycle is self-​​enforcing, how­ever, and therein lies the dan­ger. If the gov­ern­ment adopts an aus­ter­ity pro­gram that threat­ens the invest­ment envi­ron­ment, the econ­omy may become fur­ther depressed. If busi­nesses then choose to save more rather than invest, tax col­lec­tion will fall even fur­ther, nix­ing com­pletely the sav­ing inten­tion of the aus­ter­ity pro­gram and keep­ing fed­eral debt at their prior level.

The answer? Gov­ern­ment spend­ing — specif­i­cally, invest­ment. The process described above is sim­ply reversed: the result­ing bet­ter busi­ness envi­ron­ment means net invest­ment (pri­vate expen­di­ture), which allows the gov­ern­ment to save (reduced deficit). And thanks to Keynes’ mul­ti­plier effect, the net out­lay from gov­ern­ment will more than off­set itself.

So why isn’t Con­gress push­ing for increased expen­di­tures? Well, it’s gotta be polit­i­cal. The sim­ple truth is that most vot­ers don’t under­stand how the econ­omy at large works (and I don’t blame them — it’s coun­ter­in­tu­itive at best and uncer­tain at worst). So peo­ple use the sim­plest short­cut pos­si­ble: their own lives. Con­sumers can’t bor­row indis­crim­i­nately; why should the gov­ern­ment? Politi­cians are, so the story goes, afraid of incur­ring the wrath of the voter.

But this story doesn’t go far enough: polit­i­cal data shows that unem­ploy­ment is a much bet­ter indi­ca­tor of elec­tion results than just about any­thing else. Politi­cians know this. And strong gov­ern­ments have been happy to pro­vide the nec­es­sary fis­cal relief. China, for exam­ple, dumped hun­dreds of bil­lions of well-​​targeted invest­ment stim­u­lus into its own econ­omy, resum­ing immense growth this year. Britain (before its cur­rent coali­tion was elected) ran sim­i­larly large deficits.

Amer­ica, how­ever, does not have a strong gov­ern­ment. It has a weak gov­ern­ment — a divided gov­ern­ment. It takes 60 votes in the Sen­ate and 218 in the House. Since the Democ­rats don’t have it, and were rel­a­tively divided even when they did, cre­at­ing a com­pro­mise that tar­gets stim­u­lus funds effec­tively does not come eas­ily. It’s hard to get the votes, so other bills, while less effec­tive for the econ­omy, get polit­i­cal pri­or­ity. It’s bet­ter to accom­plish some­thing, I guess.

(Photo: Neu­bie)