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Size is not the issue

I am talking about the federal budget deficit.  The issue regarding the deficit is who benefits from it.  It’s been this way for a long time.  Don’t think so, well then consider this: notice that after Wall Street’s income levels were restored with government bailouts we were inundated with deficit hysteria in the media.  This is just one example of many (others: corporate subsidies, privatization of government services, huge tax cuts for top incomes).

This bears repeating regarding the deficit:

1)  Deficits have been the historic norm not the exception.  The exception has been budget surpluses.
2)  Attempts, successful or not, to balance the budget have been followed by recession or worse Great Depression.  This includes those Clinton surpluses - a recession began in March 2001. 

We really have to get over this myth that the federal government is like a household or business.  It is far far different.  You or I cannot issue our own currency like the federal government.  Mainstream economics either can’t understand this or chooses to perpetuate this myth in the interest of preserving/defending years of faulty research/theories.  Federal government, with its monopoly over the issuance of currency, is the only entity in the economy that can run a deficit for long periods of time and not have to file for bankruptcy.

There’s another thing that we, including mainstream economists, don’t understand or choose to ignore and that is the concept of sector balances.  In our economy there’s the government sector, private domestic sector (that includes us) and the import/export sector (or Rest of the World).  This isn’t a theory - this is an operational reality.  With these three sectors we get this identity:

GFB + PDFB +RWFB = 0

GFB is government sector financial balances, PDFB is private domestic financial balances and RWFB is Rest of World financial balances.  This is how our economy works - the financial balances of these three sectors add to zero.  Again, this isn’t a theory this is an operational fact or reality.  With some basic algebra we get this:

-GFB = PDFB + RWFB

That’s a negative government sector balance or deficit.  This means that government deficits lead to positive private domestic financial balances but we run a negative RWFD or current account deficit (little more than a trade deficit) so this means that government sector deficit has to even larger to keep private domestic sector balances positive (which is a good thing). 

Check out this graph:

Source: Another Take on Financial Balances

The red line is government sector balances or mostly deficits and black line is private domestic sector plus rest of the world or NGFB - non-governmental financial balances.  Notice how the lines move in opposite directions - that’s because of the above mathematical (or accounting) identity.  This graph was generated with REAL numbers and not some computer generated model. 

The above should tell us that balancing the budget or achieving a budget surplus will lead to negative balances or more debt for private sector which cannot keep borrowing forever as we are finding out the hard way in this financial crisis.  But this also tell us something else.

We have the highest government deficits, in terms of dollars, on record.  But we have:

1)  Highest level of income inequality since the Great Depression;
2)  Record corporate profits and huge bonuses for Wall Street;
2)  Under/unemployment rate above 16%;
3)  Foreclosures at an all time high;
4)  Over 1 million people filing for bankruptcy in 2010 and higher number expected in 2011;
5)  State budget crises that are leading to higher taxes, cuts in important programs and lay-offs of public workers.

Clearly the federal budget deficit is not benefiting those who need it the most - poor and working class families.  But we never learn - Washington and most of general public are gripped by deficit hysteria.  Economic justice will be a long way a way until we understand what the real issue is regarding the deficit - WHO benefits.

Good luck. 

Additional source:  What is Responsible Fiscal Policy?