Monday, October 14, 2013

Why Not A Balanced Budget?

In a comment to an earlier post Bruce asked what the problem was with having a balanced budget and why an economist would claim that a balanced budget is a bad idea. The answer lies in the totally unchallenged statement by politicians and economists both that “consumer spending is 70% of our economy” and that restoring a healthy economy requires restoring that 70% which is consumer spending.

That would be fine, and was fine, so long as that money was being spent on goods and services made in this country, but that is not the case and has not been for many years. A considerable part of that spending is for goods from other countries, which is reflected in our balance of trade deficit, and which no one ever talks about. It is a huge negative, has been for many years, and it reflects wealth leaving this country and not returning. That means that we consume more than we produce, and that means that our economy depends upon the accumulation of more and more debt.

During the housing boom much of that debt was accrued by the private sector, while at other times debt has been accumulated by the business sector. But in order to continue consuming more than we produce, somewhere we have to create more and more debt.

When the private sector cannot assume any more debt, and the business sector cannot do so, then government must assume debt, which is where we are now. So the economists are, to that degree, correct. An attempt to balance the budget, either by reducing government spending or by raising taxes, would be disastrous.

If we ceased accepting the simplistic insanity of “restoring consumer spending” and restored a productive economy in which production balanced consumption and in which our balance of trade was a net positive, then we could balance the federal government budget quite safely without harming the economy at all, because such an economy would not have to accumulate debt in order to maintain itself.

Politicians may not know that. Economists do, they just don’t want to say so, because doing that would be too hard.


bruce said...

So basically we're screwed.

c0nc3rn3dguy said...

Excellent explanation. You nailed it.

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