Why did U.S. budget debt policy change drastically in the 1930s?
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The "Sectoral Balances" theory
Is there a need to run deficits in order to insure adequate savings in the private sector?
If a govt surplus is run, there will be fewer dollars.
But that's bad only if you mean a sudden large surplus, disrupting an earlier pattern of year-to-year deficits. But if the surplus is a regular modest surplus, like in the 1920s, then the term "fewer dollars" doesn't mean anything significant.
You can say there are "fewer dollars" and thus no "economic stimulus," but there will also be lower prices, over those several years, and thus higher spending power and thus offsetting the fewer dollars = no net change in the real economy.
The central bank has measures to offset any disruptive shortage or excess of dollars in circulation (Otherwise, what is the meaning of the phrase "print money"?), if some sudden plunge of the money supply happens. So it's not clear what the "fewer dollars" problem is. I.e., there's no need to fear a shortage of money causing less savings, and thus no need to boost the dollars to induce more savings.
Rather, the only need is to keep the money supply stable, not fluctuating up or down radically, not suddenly changing. That is the only need. There might be economic phases where savings is legitimately low. Why does that matter? Why artificially boost savings contrary to the natural trend at the time? The government could reduce the deficits over time, or even balance the budget or run modest surpluses, without causing a "fewer dollars" problem needing correction. Rather, the price level would respond to it, decreasing slightly, so everything evens out, because "fewer dollars" necessarily must lead to lower prices.
So, what is the fuss about savings? The "sectoral balances" theory adds nothing new to what is already obvious. All that's necessary is for the public sector to try to be stable rather than fluctuating wildly from one year to the next. Keep the public sector at a constant percent of the economy, with only tiny degrees of fluctuation from one year to the next, and then the quantity of dollars will remain about the same. And that's generally what happens anyway, BUT . . .
What is the real net impact of the chronic deficits?
. . . the habit of always running high deficits is not necessary. This leads to "more dollars" rather than fewer, and thus to higher prices also, and so the economy is just maintained at that level of dollars with nothing new gained by the repeated artificially-high deficits. Except for
the price of maintaining this debt, which is the annual interest payments.
Whereas with overall balance -- deficits offset by surpluses -- there is no such interest cost, and so trillions of dollars are saved over many years. The deficit might be necessary for something unusual, as a one-time event (like WW1), which is paid down later. So there are periods when debt is necessary, but not chronic debt running more than 50 years.
With the money supply (quantity of dollars) being kept about the same over many years (not day-to-day, but throughout several weeks or months), there is no need to correct for "fewer dollars" or "more dollars" than the supposed right amount. Rather, the price level settles out at the ongoing money level or quantity of dollars. There can be no problem of a "lack" or "shortage" of money, or oversupply, over the long period of many years. Any market can settle to a stable price level if the quantity of dollars is kept at about the same level. Whether there are 100 quadzillion dollars, or only 10 trillion. There's no such thing as too few dollars or too many.
So it's really not clear that there's any need to artificially boost savings, as if there's a shortage of money in the private sector vs. the public sector. Just have the public sector remain stable, not fluctuating greatly from one year to the next.
The "sectoral balance" theory could make sense if it refers to the public sector radically changing from one year to the next, going from high spending to low, or from high taxes to low, or starting up a new major war every 3 or 4 years, or doing sudden major infrastructure programs requiring huge resources, and so sharply changing govt demand from one year to the next. That could cause the money circulating to change abruptly and cause the savings rate to change from one year to the next.
But with the public sector remaining stable and not suddenly changing its demand, there's no reason for the year-to-year deficits to cause higher savings or the year-to-year surpluses to cause lower savings. E.g., if the public sector is constantly taking in high tax revenue but spending little of it, running a surplus consistently, then the dollars might become fewer (or gradually decrease over many years), but that smaller quantity is an ongoing phenomenon over many years, so the lower money level settles in and produces long-term lower prices, and the result is no different than if the total dollars in circulation had gone to a higher level. I.e., if all prices are raised slowly up (or down), throughout all the economy, no one's condition is changed.
Hypothetically, if all prices for everything are doubled, uniformly across the economy with no exception, then the economy doesn't really change, and everything remains the same. Everyone's paycheck doubles, but so do all the prices, and so there is no real change just because of all the prices being doubled. The dollar amounts are only nominal, not the real wealth.
Bottom line to all the above: It makes no sense to say that a shortage of money (or "fewer dollars") requires special injection of new money in order stimulate private savings. This is an imaginary need.
Selling exports is another way to accumulate savings, but we buy more than we sell. So, again, deficits are necessary to satisfy the savings desire of the private sector.
You keep repeating this slogan. But you don't have any facts to prove it. You are just seeking an excuse to justify chronic deficits. Where are the facts to show that no country ever balanced its budget without also losing all its private savings?
Again, I never said that.
Here's wikipedia on sectoral balances
In any given time period, the . . .
Clarification: this is a theory by one British economist, Wynne Godley (1926-2010), not a generally-established principle of economics. It's not in Economics 1A or in Samuelson's
Economics, but is simply the theory of one economist. And it had no connection to the change which occurred in the 1930s of increasing the budget deficits. So this theory does not explain why the US began running high chronic budget deficits beginning in the 1930s.
In any given time period, the government’s budget can be either in deficit or in surplus.
OK, but this has no importance unless it's about major abrupt changes from one year to the next. It's not about the normal condition of the budget remaining steady at a low deficit level, or high, or a low surplus level, or at zero balance, etc., and staying about the same over many years. If it affects the money supply in the private sector, this effect is constant or steady over many years, not abrupt, with minute gradual change only, and so at that money-supply level, the prices settle at a constant level, and the overall wealth and production in that economy is the same as it would be if the money supply had been much higher or lower, and the savings rate remains the same, in real terms. If all prices are twice as low because of "fewer dollars" circulating, then the savings is twice as low also, staying at the same level and meeting the same demand by investors as would be the case if the money supply had been twice as high.
So nothing significant changes as a result of a higher or lower money circulation level, as long as that level is maintained steady over many years, and that public sector remains stable, with constant level of debt or surplus. I.e., this theory (of economist Wynne Goddley) may have merit in a case where the surplus/deficit condition of the public sector keeps changing radically from one year to the next, but does not apply otherwise.
[Godley, continued] A deficit occurs when the government spends more than it taxes; and a surplus occurs when a government taxes more than it spends. Sectoral balances analysis states that as a matter of accounting, it follows that government budget deficits add net financial assets to the private sector.
Nothing new here. Deficits "stimulate" the economy, as Keynes already said earlier, and everyone knows this. The deficits add more spending AND saving in the private sector (not just more saving -- it's about total private income or total private money supply). And a sudden government deficit does increase the dollars, shoving prices up and causing a temporary kick to the economic activity, and thus a short-term instant gratification element which makes some people feel good, until there's a need for more deficits to keep it going.
The level of deficit/surplus means nothing of practical result as long as the deficits/surpluses are kept steadily at the same level over many years, with little fluctuation. Those added "net financial assets" (caused by deficits) lead to a degree of higher prices, so everything is a little higher, and everything in that economy adjusts to the higher price level, and thus nothing real changes, but only the nominal prices in dollars.
[Godley continued] This is because a budget deficit means that a government has deposited more money into private bank accounts than it has removed in taxes.
Oh goody! govt depositing money into my account! I'll vote for that guy!
Still nothing new here, same old "economic stimulus" idea, and with the same flaws, which we can ignore here, resulting in higher private spending and saving. Same old "economic stimulus" theory but now carrying the "sectoral balance" label.
Assuming the theory is correct, and ignoring the flaws, there's no practical result from this, over many years, as long as this depositing (into our bank accounts --
goody-goody!) remains about constant, without sudden huge deposits one year and zero deposits the next year. So about equal deposits over many years, and/or steady (and small) removal of money by taxes, all kept uniform without significant change or fluctuation -- which allows the prices of everything to settle out, rising or falling as necessary according to the money-circulation level, and no difference in the actual wealth or production or economic growth from what would have been the case if instead there had been a steady condition of surpluses (and withdrawal from our accounts --
Boo!). The only difference is in the nominal dollar prices, not the real values.
(Obviously we'll all vote for the politician who promises to deposit money into our accounts. Democrats must prevent Trump from hearing about this, or he'll adopt this "sectoral balances" theory, make promises to deposit money into our bank accounts, and get himself elected for life.)
[Godley continued] A budget surplus means the opposite: in total, the government has removed more money from private bank accounts via taxes than . . .
Yes, but also from the economy generally. From everyone, i.e., from all the spending. This is just the same old "economic stimulus" idea. More stimulus = more money for people to spend or save. Less stimulus = less to spend or save. It's not specifically about saving.
. . . the government has removed more money from private bank accounts via taxes than it has put back in via spending.
And so a lower price level, i.e., lower nominal prices and thus the same living standard, same production, same economic activity there would have been with deficits instead of surpluses. It's the same economy, regardless of govt surpluses or deficits, as long as this is a process of many years and a process of a steady budget and regularity of the deficits or surpluses, as in the real world, generally. And the same savings rate either way, with total savings being higher with higher deficits and higher prices, and lower with lower deficits and lower prices. I.e., no difference, because if the total money circulating is twice as high, then the savings is also twice as high -- only nominal differences, no difference either way in the actual economy, i.e., real savings, real wealth vs. nominal.
(Except we'll all get richer if Trump deposits more money into our accounts --
goody goody!)
So the notion that deficits are needed to produce higher savings is false (and mostly nutty). If the total money is twice as low, then the total savings also is twice as low, which is only the nominal dollars and not the real economy itself, which continues along the same at a higher or lower price level, or money supply level.
[Godley nuttiness continued] Therefore, budget deficits, by definition, are equivalent to adding net financial assets to the private sector;
But these assets are only the nominal dollar amounts -- no actual wealth is added to the private sector by the budget deficits. It's the same wealth but at higher prices which can nominally go up or down, as long as the changes are gradual, spread out over several years.
. . .
whereas budget surpluses remove financial assets from the private sector.
https://en.wikipedia.org/wiki/Sectoral_balances
They don't remove wealth or real values, but only reduce the nominal prices. The "assets" only means the prices, the money, but not the real wealth.
Less total money circulating = lower dollar prices for the same real wealth or production.
More total money circulating = higher dollar prices for the same real wealth or production.
(But still Trump's got my vote if he promises to deposit all those dollars into my account --
goody! goody!)
So the theory has possible merit only if it describes an economy where the public sector keeps shifting from one year to the next (which it does not do), abruptly changing its production, spending, taxing. But the theory becomes irrelevant for a normal economy where the public sector remains stable over many years, keeping the spending and producing and taxing at about the same levels, with only small change. Either high deficits or high surpluses -- no real difference, as long as these are steady and regular, with only minor changes, i.e., only minor shift of the deficit up or down. Gradual. Which is the normal market behavior, rather than sudden change/dislocation.
Currency issuing govts are not like households or businesses. They create the money they need, ex nihilo. They can never run out, they can always pay bills due in their own currency.
Of course they can run up inflation 1000% per year (or per week), like Germany in the 1920s. This is not how the U.S. is paying its bills. There are some manipulations to modify the money in circulation by small measures, but this only makes sense to stabilize the inflation rate, or maybe push interest rates up or down 1/10 of a point -- but not to pay bills such as for funding defense or welfare etc.
Of course it's to pay bills.
You mean the government runs up inflation as needed, 1000% per year like Germany did (or 100%, or 50%), in order to pay its bills? That's how we pay for national defense? by inflating the currency so our money loses value every day? No, inflating the currency is not done in order to pay for national defense and Medicare and other bills.
The money paid by taxpayers is used to pay bills. The higher the bills are for military or food stamps or Medicare, etc., then the more the taxpayers are assessed, and also the greater is the borrowing of the dollars from lenders, to pay the bills. But these bills are not paid by creating money ex nihilo. That would reduce or eliminate the need for taxes.
That's not how those budget items are paid for. The question is not what the money is for, but how it's paid. The money is not paid by creating it ex nihilo for the spending programs. It's paid by borrowing it or taxing it.
No matter how large ten gazillions, whatever. It's just a number.
You're not getting this from any responsible source on economics. No economist is saying the gov't can run up bills tens of gazillions or trillions or billions and it doesn't matter because the gov't can simply create the money they need ex nihilo.
Again you miss the point.
What nutty point are you making when you say the government can pay for national defense ("pay bills") by creating the money ex nihilo rather than by collecting taxes or borrowing the money?
I plead guilty to missing that point. You're wrong to say this is how the govt pays the bills.
Because the govt has the capability doesn't mean it should be done.
Then what
does it mean that it has this capability? Why do you claim it's so important what the government can theoretically do but never would and never could do in practice?
Focus on what? -- wacky nonsense that the govt pays its bills by printing money?
I'm focused on why it was necessary for the US to suddenly start running much higher debt beginning in 1930, when this was not necessary before then. What changed in 1930 to make chronic deficits necessary? What has been the benefit of it? What have we gained for the trillions of dollars it has cost us?
Your only focus has been two phony responses to why this deficit policy was adopted in the 1930s: First you said no change really did happen in 1930, from low debt to high debt/deficits. Yet all the facts show there was such a change, radically driving up the debt-to-GDP ratio.
Then you tried to explain the new deficit trend, beginning in 1930-35, on a theory which did not exist until the 1950s at the earliest, and the guru you cite as the authority on it was not published until decades later, after the addiction to these deficits had been established for 50 years or longer.
Now you're shifting the focus to hyperbole about the govt paying its bills by printing money, like Germany did in the 1920s.
So your focus has gone from denying any change happened back then, to explaining the change with a theory which didn't exist until 50+ years later than the change happened, to a denial that any debt matters because it can always be paid by printing money.
Why should anyone "try to focus" on such nonsense?
The US cannot be forced to default, not by foreign powers, not by the bond markets.
There are ways the US could default. It will not simply "create the money they need, ex nihilo" to pay it. That might be worse than default.
I said the US can't be
forced to default.
But it would choose to if demand for new bonds is too low to produce the revenue needed to pay back the earlier ones due. Default could happen due to conditions making it the better choice than massive inflation or massive cuts in spending which the public would not tolerate.
The quotes (or misquotes) in your "show" text are being misused by you. None of those persons proposed that the US might ever resort to 1000% inflation to pay its bills. Just because it's technically possible doesn't mean it's a practical possibility. Default is more practical, or the lesser evil, than massive inflation.
Who would make such a recommendation? You're being ridiculous.
So then we agree it would be ridiculous to "print money" to pay back the debt rather than default, if that choice should occur.
Inflating the currency to pay its bills, like Germany did in the 1920s, would be ridiculous, you're right -- the decision instead would be to default, if those were the only choices. And such a choice is possible. You don't know it could never happen. Of course severe AUSTERITY is also an alternative. The point is that there is no guarantee of getting the new bond-buyers to pay for new debt. So severe austerity and default are both possibilities, when the payment would come due but could not be paid because of decreased demand for the bonds.
Responsible decision-makers would choose default in a situation where the budget needs 5 trillion $$$ and there is only 3 or 4 trillion in revenue and too few bond-buyers to provide the added revenue to make up the deficit. Or extreme austerity. They would not choose to inflate the currency, as you and some of those quotes (about "printing" money) seem to imply, because the high inflation rate would be unacceptable.
By defaulting they would eliminate that cost from the budget, the interest-due and the earlier principal coming due, plus future interest and principal due in coming years. Some austerity also might be necessary, to proceed without future debt, introducing the necessary spending cuts and tax increases, controlling the budget to a level that could be covered by the future revenue. Or also they might get the debt "restructured," but that's the same as default.
Whereas massive printing of new money, inflation, would be worse than default.
It's difficult to imagine a Federal Reserve Chairman saying seriously that the US can just print money to pay its bills.
Google them, and show me if there's any misrepresentation there.
OK he did say the words you quoted:
https://www.youtube.com/watch?v=-_N0Cwg5iN4 But it's obvious he was trying to give reassurance to investors that T-bills are safe. He knew he was lying when he said there was "zero probability of default." A public figure sometimes has to say the right words, for the symbolism, even if it's a lie.
Eventually there could be a stampede of investors away from these bonds. So the right approach now is to say whatever is needed to delay that stampede for as long as possible -- if that's your point, maybe you're right.
