Rebecca Wilder comments on the question of whether a falling US public deficit is bad news:
It doesn't matter why the deficit is falling or why it's lower than expected. This only proves the endogeneity of the deficit: the sole reason that the real economy is experiencing stronger-than-expected growth in tax receipts is because the government ran large deficits. If policymakers start to back off, or worse yet, cut back, the axiom of national income accounting foretells a liquidity squeeze on a private sector whose desired saving is much higher than actual saving. Default, then, would be the only way out. Basically, you drop the deficits now and you shoot yourself in the foot.
Koo is right: we need to be running bigger deficits in order to get the deleveraging process going, and remove the threat of "endogenous" fiscal deficits. It's "jobs hysteria" not "deficit hysteria". The fiscal impetus is germane to the recovery. Until Congress understands that, we might have a Japan 1998 on our hands, or worse yet, a US 1938. People think of the deficit as an exogenous "thing" that the government can control. That's the wrong way to look at it: it's completely endogenous.
Final destination "growing public deficits" with a stopover in "falling public deficits," by Rebecca Wilder: Brad DeLong and Mark Thoma posit that a falling US public deficit is bad news – they are right!
Deficit hysteria is now mainstream thinking, while the more appropriate hysteria should be “jobs hysteria”. How in the world is nominal income growth expected to finance a drop in consumer debt leverage if the government supports a smaller deficit? TARP costs less and tax receipt growth is beating expectations. But that's all it is, beating expectations.
This only proves the endogeneity of the deficit: the sole reason that the real economy is experiencing stronger-than-expected growth in tax receipts is BECAUSE the government ran large deficits.
Put it this way: as long as the US current account deficit is rising or stable, then a shrinking government deficit will, by definition, squeeze liquidity from the private sector. During a “balance sheet recession”, the government should be growing its balance sheet not shrinking it.
An excerpt from the Japan's Quarterly Economic Outlook (Summary) (Summer 1997):Thus, recovery in personal consumption is expected to continue after the reaction to the rise in demand ahead of the consumption tax hike subsides in the near future. However, the pace of recovery is likely to be moderate considering the increases in the tax burden, such as the rise in the consumption tax.Boy were they wrong – moderate?
GDP fell 2.0% in 1998 (from +1.6% growth in 1997) and consumption growth turned negative over the year, -1.1% (from +0.8% in 1997). Please see slide 9 from one of Richard Koo’s presentation in 2008; he highlights the policy-mistake-induced “unnecessary government deficits". The point is: the government deficit is not some exogenous “thing” that the government controls; it’s very much endogenous and a function of private demand.
We’re on this road now: squeezing liquidity out of the private sector; supporting minimal wage growth; and imminent deleveraging is on the horizon(more likely the default route). And Congress is happy that they are squeezing private sector liquidity? I guess so, as reported by the Wall Street Journal yesterday:Like a number of Democrats, Mr. Blumenauer said he's "intrigued" with the consumption-tax idea. Tax experts say consumption taxes are regressive, because lower-income people tend to spend more of their income. But a consumption tax could be designed with offsetting breaks for lower-income Americans, to shield them from its impacts.