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The government budget is like a family budget

The Treasury/Fed create money backed by the full faith and credit of themselves, therefore they are not like a household in that they're by definition solvent in their own currency without reference to standard balance sheet accounting.

That's a huge difference.

As a policy position, "the government is like a household" is consistent with the policy goal of protecting the purchasing power of rentiers' net worth, and inconsistent with the policy goal of full employment.

Therefore, "the government is like a household" cannot be a left policy position.

Note, however, that state and local governments are indeed like private entities and can become insolvent, only the Fed/Treasury system is not bound by a budget constraint because it has access to seniority income to fund expenses in the local currency.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sun Jul 10th, 2011 at 08:10:37 AM EST
[ Parent ]
You want to make policy concrete to ordinary people, so you relate it to things in their ordinary lives. People are not so stupid that they don't realize that most households can neither print money nor operate armies. So what? The US tax code implements a $1trillion/year transfer of money from the poor/middle to the rich. Casting that transfer as a luxury that "the household" can't afford may not be the way you want to speak of the problem, but it's absurd to claim that analogy used to drive the argument is inherently right wing.
by rootless2 on Sun Jul 10th, 2011 at 08:26:17 AM EST
[ Parent ]
"The government is a household" lends itself very strongly to "governments must balance their budgets."

The latter is, I hope you will agree, an inherently and indisputably right-wing narrative.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 10th, 2011 at 08:46:27 AM EST
[ Parent ]
The analogy can lend itself to whatever one makes vivid. Don't pick at the metaphor, you'll make it bleed - as someone once said. The idea that in the long term the government should balance the budget seems to me to be perfectly reasonable. I am unconvinced that dedicating a large portion of tax revenue to rentier bond income is such a great idea.

For example, instead of increasing US debt, if the central bank simply destroyed its holdings of treasury bonds and perhaps also acquired the mortgage backed bond holdings that the Treasury is parking in some legal half-way house now, it would reduce the deficit and the long term debt burden.

by rootless2 on Sun Jul 10th, 2011 at 08:53:55 AM EST
[ Parent ]
The idea that in the long term the government should balance the budget seems to me to be perfectly reasonable.

In a nominally growing economy, balancing the sovereign budget is deflationary. Unless you believe that economic growth makes people want to hold a lower amount of purchasing power in government securities.

I am unconvinced that dedicating a large portion of tax revenue to rentier bond income is such a great idea.

Balancing the budget, by being inherently deflationary, does precisely this.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 10th, 2011 at 09:00:19 AM EST
[ Parent ]
The US government spends around $400b/year on debt interest. That's enough money to fund a hell of an infrastructure project - and it currently is a dedication of a large part of government revenues to rentier income.

The goal of the right is to increase that by starving revenue and creating financial crisis. At that point, the government is directing a huge percentage of tax revenue at bond investors and becomes captive to the demands of the bond market.

by rootless2 on Sun Jul 10th, 2011 at 09:57:36 AM EST
[ Parent ]
That is a complete red herring when discussing fiscal policy. It has nothing to do with the federal budget and everything to do with the Federal Reserve deciding to subsidise bondholders. If the Fed continues to decide to do that, no amount of balancing the budget will ever reduce the subsidy, and if the Fed decides to stop doing it you can run any deficit you like for as long as you like (barring dollarisation of your economy).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 10th, 2011 at 10:15:42 AM EST
[ Parent ]
90% of people would look at a budget where the Central bank purchases and destroys $500B/year of treasury notes and the budget is in balance and be satisfied that the government was living within its means.

Deficit means borrowing to most of us.

by rootless2 on Sun Jul 10th, 2011 at 10:48:48 AM EST
[ Parent ]
But if the government sells $500B/year in treasury notes to the Fed it would be $500B/year in deficit. The budget would not be balanced. And there wouldn't be a problem because the Fed passes on its profit to the Treasury so any debt from the Treasury to the Fed is ultimately owed to itself.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jul 10th, 2011 at 11:26:48 AM EST
[ Parent ]
The problem would only arise if the Fed ever sold its holdings back into the private market.
by rootless2 on Sun Jul 10th, 2011 at 11:53:28 AM EST
[ Parent ]
Right, so the situation we're in now is one in which the "debt ceiling" would be a binding constraint if all the Federal debt were in private hands, but since lots of it is in the hands of the Fed it shouldn't count. Except, for people who obsess about the government balance sheet, it does count.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jul 10th, 2011 at 12:45:24 PM EST
[ Parent ]
in fact, even though I don't think that debt is problem free, the interest rate burden on the US government is historically low so the debt is certainly not an emergency issue.

The point I'm making is that balancing the government books does not have to carry a right wing argument. In fact,the Irish opposition should  be arguing that like any householder who has overextended on a mortgage, the Irish government needs to cut its losses, turn the assets over the the lender and try to make do on a more modest budget. The motivations for jumping up and down and yelling that governments are not like householders are unclear.

by rootless2 on Sun Jul 10th, 2011 at 12:53:50 PM EST
[ Parent ]
In arguing with conservatives (you should try it) I have used the argument that we borrow to buy houses and to send our kids to college and the government is in the same situation.  People understand that a lot better than "the senior debt issuance capability of the central bank .... "
by rootless2 on Sun Jul 10th, 2011 at 08:56:42 AM EST
[ Parent ]
The problem is that since conservatives agree with progressives on the need for austerity, we need to start by arguing with progressives.

First convince yourself, then convince your friends, then convince your enemies. We're still in the situation where "our side" is part of the Hooverian consensus.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sun Jul 10th, 2011 at 09:14:25 AM EST
[ Parent ]
Hooverian consensus? Where? Obama is certainly not calling for drastic reductions of Federal spending - he specifically exempts recovery, education, and infrastructure from his targets and also proposes that social benefits not be cut.
by rootless2 on Sun Jul 10th, 2011 at 10:00:40 AM EST
[ Parent ]
People also understand "there are people who want a job. There are jobs that need to be done. Having the government pay people to do these jobs means everyone wins. Except the banksters, who don't want people to have jobs, because people without jobs make better debt slaves."

There is no need to concede that you need to subsidise the banksters by balancing the budget.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 10th, 2011 at 09:25:50 AM EST
[ Parent ]
Who is conceding that you need to subsidize bankers?
by rootless2 on Sun Jul 10th, 2011 at 09:52:42 AM EST
[ Parent ]
You do. Balancing the budget is a bankster subsidy, because it is deflationary as long as nominal GDP is growing.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 10th, 2011 at 10:04:34 AM EST
[ Parent ]
No it's not. There was no deflation under Clinton as US budget went into surplus.  If the government balanced the budget by printing sufficient funds to cover the deficit, would that be deflationary?
by rootless2 on Sun Jul 10th, 2011 at 10:43:37 AM EST
[ Parent ]
There was no deflation under Clinton as US budget went into surplus.

Because clearly the downward part of the business cycle is an outlier and may be safely ignored.

If the government balanced the budget by printing sufficient funds to cover the deficit, would that be deflationary?

No, but it would be a very strange definition of "balancing your budget."

If you think that redefining balanced budgets is an easier sell than arguing that balanced budgets under the current definition is bad policy, then by all means go ahead. But do make clear to people who criticise you for wanting to balance the budget that you are using an idiosyncratic definition of that term. That will avoid many miscommunications.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 10th, 2011 at 12:28:03 PM EST
[ Parent ]
You want to make policy concrete to ordinary people, so you relate it to things in their ordinary lives.

It so happens that macroeconomics is counterintuitive, so maybe ordinary people are natural-born common-sense conservatives when it comes to economics.

It's abcolutely fascinating that the only congresscritter able to think out of the Hooverian consensus is Ron Paul. From Dean Baker: Ron Paul's Surprisingly Lucid Solution to the Debt Ceiling Impasse

The basic story is that the Fed has bought roughly $1.6 trillion in government bonds through its various quantitative easing programs over the last two and a half years. This money is part of the $14.3 trillion debt that is subject to the debt ceiling. However, the Fed is an agency of the government. Its assets are in fact assets of the government. Each year, the Fed refunds the interest earned on its assets in excess of the money needed to cover its operating expenses. Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself.
As long as the Congressional Democrats keep trying to appear serious and Obama tries to appear reasonable, it's only going to be people like Ron Paul, who know they are considered unreasonable and unserious but don't care, that are going to speak sense about the Depression of the 2010s.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jul 10th, 2011 at 09:20:31 AM EST
[ Parent ]
I like this plan - which is similar to a plan I've been trying to push for a year in which the Fed simply buys the stock of financial assets held by the mortgage agencies of the government.

But to me the optimal outcome would be a settlement that takes away subsidies of the richest companies followed by a FRB action of that sort.

by rootless2 on Sun Jul 10th, 2011 at 10:45:34 AM EST
[ Parent ]
By the way, although it violates the narrative of the "left", the Democrats did come up with a reasonable plan.

http://www.washingtonpost.com/business/economy/senate-democrats-draft-debt-reduction-plan/2011/07/08 /gIQAFQbS4H_story.html

by rootless2 on Sun Jul 10th, 2011 at 11:00:34 AM EST
[ Parent ]
I love the WaPo's narrative setting: Senate Democrats have drafted a sweeping debt-reduction plan that would slice $4 trillion from projected borrowing over the next decade without touching the expensive health and retirement programs targeted by President Obama.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jul 10th, 2011 at 11:29:19 AM EST
[ Parent ]
So talk about how you're going to encourage job-creating projects, not about balancing the budget. Because people don't care whether the federal government is in balance as long as they can find a half decent job.

On making policy concrete for ordinary people, which includes congresscritters, here's Brad DeLong: What Have We Unlearned from Our Great Recession?

Remember Orwell's Animal Farm? Every animal on the Animal Farm understands the basic principle of animalism: "four legs good, two legs bad" (with a footnote that, as Squealer the pig says, a wing is an organ of locomotion rather than manipulation and is properly thought of as leg rather than an arm--certainly not a hand).

"Four legs good, two legs bad," was simple enough for all the animals to understand. "Short-term countercyclical budget deficit in recession good, long-run budget deficit that crowds out investment bad," was too complicated for Congressmen and Congresswomen to understand. Given that, discretionary fiscal policy should be shunted off to the side as confusing. The Federal Reserve should do the countercycical stabiization job.

I suppose you're arguing "the federal government is like a household" is easy enough for congresscritters and voters to understand. But when cutting spending fails to reduce the deficit, how do you explain it to people?

Unfortunately Macroeconomics is counterintuitive:

That doesn't mean you can't learn from history.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sun Jul 10th, 2011 at 09:27:47 AM EST
[ Parent ]

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