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     A propaganda campaign is being waged. They're using fear. There's a debt crisis, we're told, and we're supposed to be afraid of the federal deficit. But what if the federal budget can't be balanced ? What if we're stuck with a budget deficit, for the time being, no matter what we do ?

     This is the argument made by James K. Galbraith in his 2008 book The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. Here's Professor Galbraith:

     Deficit hawks - Democrats and Republicans alike - have never understood the effects of financial globalization on the budget. The international dimension of the budget deficit enters neither their minds nor their calculations. The Washington discussion circuit, fueled by a vocal lobby of doomsayers, continues to treat deficits as it had before, as though they were the product purely of domestic policy decisions taken in the context of balanced trade and full employment. In consequence, the public discussion of fiscal policy lost contact with reality altogether; it became instead a pantomime of vice and virtue, each achieved without any relation to actual merit of wisdom in the setting of economic policy.

 

     The relationship between the federal budget deficit and the foreign trade deficit is know in macroeconomics as the Twin Deficits Hypothesis. At its most basic level it is little more than an exercise in elementary algebra. You can set two widely accepted definitions of GDP equal to one another, simplify and combine terms and show that a foreign trade deficit is equivalent to a federal budget deficit. (Those who wish to can see that exercise here.) This hypothesis was used by deficit hawks in the 80s, among them Paul Volcker, to argue that the federal deficit somehow caused the foreign trade deficit, as though the outsourcing of manufacturing and the dependence on foreign oil had nothing to do with it. Professor Galbraith offers a more sophisticated understanding:

     There is a basic relationship in macroeconomics, as fundamental as it is poorly understood, that links the internal and the international financial position of any country. A country's internal deficit, that is, its "public" deficit and its "private" deficit - the annual borrowing by companies and households - will together equal its international deficit.

     So here's the basic relationship:

            Foreign Trade Deficit = Federal Budget Deficit + Private Sector Borrowing

     It's an accounting issue really. More is coming in to the country than is going out, so that debt has to show up somewhere. The left-hand side of the equation isn't going anywhere. We continue to require foreign oil and it's hard to find consumer goods that weren't made elsewhere. That leaves the right-hand side. Private sector borrowing is unlikely to rise. Corporations don't need to borrow, they're sitting on tons of cash. Small firms and households are already loaded up with debt and the banks aren't lending anyway. The only place the debt can go is on the federal government's ledger. Here's Professor Galbraith again:

     In sum, and to put the matter bluntly, balancing the budget is a mission impossible and a fool's errand. For practical purposes, the realized budget deficit no longer depends on federal budget policy decisions, but rather on international trade and the financial position of the private sector. So long as American foreign trade remains in a permanent state of deficit - which it has to do, so long as a growing and unstable world economy requires dollar reserves - the federal budget deficit is basically permanent.

     So there it is. Until we can export more and import less, or until, God forbid, the rest of the world decides that the dollar is no longer worthy of being their reserve currency, we're stuck with a budget deficit. It's a long-term problem, for sure, but not one we can solve right away. The deficit hysteria, the phony "debt crisis", is just more shock doctrine. The financial elite want to frighten us into cutting what's left of the social safety net, education and public sector pensions. They've ordered their servants; conservative politicians and the corporate media, to scare Hell out of us so we'll accept austerity. It worked with WMD, mushroom clouds and the invasion of Iraq didn't it ?

Originally posted to Azazello on Wed Jan 26, 2011 at 04:04 PM PST.

Also republished by Money and Public Purpose.

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Comment Preferences

  •  Tips for my small contribution. (22+ / 0-)

    Other Kossacks who have recently posted on this topic include litho here,
    and Letsgetitdone here.

    When a President goin' through the White House door does what he says he'll do, we'll all be drinkin' that free Bubble-Up and eatin' that Rainbow Stew - Merle

    by Azazello on Wed Jan 26, 2011 at 04:04:03 PM PST

    •  Hmmm... (0+ / 0-)

      ...I think our trade deficit is something like $480B, while our federal budget deficit is $1.3T. Since I doubt private debt went down by the difference, could it be you're confusing foreign debt obligations with public debt?

      No one ever created a vibrant economy by building houses for each other. Houses are built because there is a vibrant economy.

      by Doug in SF on Wed Jan 26, 2011 at 04:28:14 PM PST

      [ Parent ]

      •  Not me, (1+ / 0-)
        Recommended by:
        DaNang65

        I'm not confusing anything. Perhaps Professor Galbraith is.

        When a President goin' through the White House door does what he says he'll do, we'll all be drinkin' that free Bubble-Up and eatin' that Rainbow Stew - Merle

        by Azazello on Wed Jan 26, 2011 at 04:30:36 PM PST

        [ Parent ]

      •  What Galbraithe is saying is that as long as we (1+ / 0-)
        Recommended by:
        James Allen

        have a trade deficit we will be in budget deficit, not that they will be equal.  If we stopped the wars and increased taxes to remove the 2/3's that are caused from them then we would still be in deficit.

        THE GREATNESS OF A NATION AND ITS MORAL PROGRESS CAN BE JUDGED BY THE WAY ITS ANIMALS ARE TREATED. -Gandhi

        by lakehillsliberal on Wed Jan 26, 2011 at 05:38:31 PM PST

        [ Parent ]

  •  Tax Cuts for the wealthy "help to cut deficits" (4+ / 0-)
    Recommended by:
    Nulwee, Nailbanger, Azazello, James Allen

    Just so you know.

  •  It can't? (1+ / 0-)
    Recommended by:
    Nailbanger

    Tell Bill Clinton that.

    "We cannot have peace among men whose hearts find delight in killing any living creature." - Rachel Carson, American Author and Marine Biologist

    by GlowNZ on Wed Jan 26, 2011 at 04:08:35 PM PST

  •  Oh my God thank you. (6+ / 0-)

    I'm rereading Predator State right now.  I have a massive diary in draft tightening his views.

    This is something critical for people to understand.  And as Galbraith says in the book, the only way out of the permanent deficits is global financial reform on the scale of the Bretton Woods system (though not necessarily the same type).

    "Intolerance is something which belongs to the religions we have rejected." - J.J. Rousseau

    by James Allen on Wed Jan 26, 2011 at 04:10:26 PM PST

  •  I guess you missed the part... (1+ / 0-)
    Recommended by:
    DaNang65

    where President Obama wanted to double exports...which will have an effect on the deficit...

    Obama - Change I still believe in

    by dvogel001 on Wed Jan 26, 2011 at 04:11:38 PM PST

    •  What are you talking about, (3+ / 0-)
      Recommended by:
      Tonedevil, Stroszek, DaNang65

           missed what part of what ?

      When a President goin' through the White House door does what he says he'll do, we'll all be drinkin' that free Bubble-Up and eatin' that Rainbow Stew - Merle

      by Azazello on Wed Jan 26, 2011 at 04:19:05 PM PST

      [ Parent ]

      •  The SOTU address (2+ / 0-)
        Recommended by:
        dvogel001, Azazello

        There was a heavy emphasis on exports and what it would take to get the US competitive in export markets again.  In fact that was the primary thrust of the speech - innovation, education, infrastructure, and reform.

        The entire SOTU speech was framed in terms of recovering America's ability to have a positive balance of trade.

        50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

        by TarheelDem on Wed Jan 26, 2011 at 05:03:03 PM PST

        [ Parent ]

    •  I guess you missed the part . . . (4+ / 0-)
      Recommended by:
      tmo, dvogel001, Tonedevil, Stroszek

      where he, Bush and Clinton have all said this over the past 20 years and it's bullshit.

      Fact is, as the economy improves, all that happens is that imports go up more than exports. We simply don't make enough of the things we consume any more.

      And as more US companies offshore jobs and outsource manufacturing, imports will only go up even more.  

      Obama can wish it all he wants, until he fights for the tax and fair trade policies that will accomplish it, it will do nothing.

      Liberalism is trust of the people tempered by prudence. Conservatism is distrust of the people tempered by fear. ~William E. Gladstone, 1866

      by absdoggy on Wed Jan 26, 2011 at 04:52:04 PM PST

      [ Parent ]

  •  The deficit grew under Bush, but exploded (3+ / 0-)
    Recommended by:
    buddabelly, tardis10, Azazello

    in FY 2008 and 2009 because of the recession, which depressed revenue collection.

    When people become unemployed, they aren't earning any money, so they pay no taxes. Hence, the deficit grows much larger.

    Conversely, without putting more people to work, we aren't going to seriously reduce the deficit.

    This is not rocket science.

    For relevant sci-fi and fantasy, go to http://www.betty-cross-author.net/

    by Kimball Cross on Wed Jan 26, 2011 at 04:21:43 PM PST

  •  Return to 'the American School' or whatever it (4+ / 0-)

    called of economics.  Get rid of 'Free Trade', reimpose tariffs, rebuild domestic manufacturing.

    Further, the gov't should have its own businesses that generate revenue, allowing it to rely less on taxes.  We used to have 'state liquor stores' in Ohio.  The state sold the alcohol, and made all of the profits on same, until the capitalist lobbyists got to the politicians and got the state out of the business, turning it all over to private concerns to profit off of and redirect the cash from serving the needs of the citizens of the state and into serving the needs of those private owners of the new liquor stores.

  •  The old saying: (3+ / 0-)
    Recommended by:
    tmo, Cliss, Azazello

    If something can't go on forever - it won't.

    What is the end game?

    Which is good news for John McCain.

    by AppleP on Wed Jan 26, 2011 at 05:03:55 PM PST

    •  That's a problem. (3+ / 0-)
      Recommended by:
      Cliss, Calamity Jean, James Allen

      Right now, the other countries are using the US dollar as a reserve currency based on our economic strength and our reputation for probity, both of which have been squandered. The question is, what happens when they find, or devise, another reserve currency. There are already signs that they are doing just that.

      When a President goin' through the White House door does what he says he'll do, we'll all be drinkin' that free Bubble-Up and eatin' that Rainbow Stew - Merle

      by Azazello on Wed Jan 26, 2011 at 05:14:02 PM PST

      [ Parent ]

      •  Not as easy as it appears (2+ / 0-)
        Recommended by:
        Azazello, James Allen

        Because you have several currencies jockeying for the position of reserve currency.  For now, the dollar remains it by default.

        There is an additional issue about exports.  The global market is not a level playing field.  We have been more generous in opening up our market for most items than other countries have been.  And despite Obama's efforts that situation remains, and Republican undercutting of Obama weakens his bargaining position in trade negotiations.  The folks that Obama is negotiating with know that the Republicans in Congress will vote for anything with the label "free trade" regardless of its contents--unless they have major donors who are being screwed.  The latter was the case in the textile industry as the Republicans presided over its demise in the South.

        50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

        by TarheelDem on Wed Jan 26, 2011 at 05:21:57 PM PST

        [ Parent ]

      •  that might help us in the long run. (1+ / 0-)
        Recommended by:
        Azazello

        "Intolerance is something which belongs to the religions we have rejected." - J.J. Rousseau

        by James Allen on Wed Jan 26, 2011 at 06:17:12 PM PST

        [ Parent ]

  •  One of the implications (1+ / 0-)
    Recommended by:
    Azazello

    ...of this relationship is that you cannot have both guns and butter--you must tax to reduce the budget deficit when you have high military expenditures.  Galbraith might have some insight into this because it was John Kenneth Galbraith's job to manage price controls during World War II.

    And this is exactly what Republicans have been doing since Ronald Reagan was in office.  

    In addition, taxing the private sector has the effect of reducing the incidence of asset bubbles based on leverage (debt).

    The downside is that you lose an policy instrument for stimulating consumer demand.

    50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

    by TarheelDem on Wed Jan 26, 2011 at 05:12:59 PM PST

  •  Clinton did it for eight years. Easy to do. (1+ / 0-)
    Recommended by:
    Azazello

    Taxes equal spending. Piece of cake. Clinton showed that it can be done, how to do it and the good things that result.

    Obama and GOP simply lack the patriotism to propose taxes equaling spending.

    We'll have to wait for another courageous political leader like Clinton.

    •  You didn't even read the diary, did you ? (5+ / 0-)

           I wish it were that simple. It's not.

      When a President goin' through the White House door does what he says he'll do, we'll all be drinkin' that free Bubble-Up and eatin' that Rainbow Stew - Merle

      by Azazello on Wed Jan 26, 2011 at 06:09:16 PM PST

      [ Parent ]

      •  Clinton did it. So it is "that simple". (0+ / 0-)

        It takes political courage which Obama lack as his Reaganesque promise of cuts to Federal spending and fabulous new programs demonstrates.

        Clinton balanced the budget for eight years and his position in 93 was similar to Obama's in 09. Difference is Clinton had political courage and patriotism and did what was right for the country.  Obama did what was expedient and that is reflected in his phony speech.

        •  It's got nothing to do with courage. (1+ / 0-)
          Recommended by:
          Sparhawk

          Read the diary, read the thread. Clinton was able to balance the budget, for only his last year by the way, because the private sector was going into debt like crazy.

          When a President goin' through the White House door does what he says he'll do, we'll all be drinkin' that free Bubble-Up and eatin' that Rainbow Stew - Merle

          by Azazello on Wed Jan 26, 2011 at 07:02:01 PM PST

          [ Parent ]

          •  Requires courage, patriotism, leadership. (0+ / 0-)

            Putting the country's best interest ahead of one's own, something Obama has never done and why his presidency failed.

            To the point of the budget, Clinton took the courageous step of laying out a balanced budget and over eight years got the US to budget surplus.

            Obama never even tried.  His speech now is empty because Obama will not tackle the real problems with real solutions.

            •  It's easy to balance the budget... (1+ / 0-)
              Recommended by:
              soros

              ...when you're in the midst of a massive asset bubble.

              Very hard now. Difficult choices, and just taxing the rich doesn't get you nearly enough.

              (-5.50,-6.67): Left Libertarian
              Leadership doesn't mean taking a straw poll and then just throwing up your hands. -Jyrinx

              by Sparhawk on Wed Jan 26, 2011 at 07:45:18 PM PST

              [ Parent ]

              •  Clintons balanced budgets CAUSED eco expasion. (1+ / 0-)
                Recommended by:
                Nailbanger

                aka the "asset bubble" by government no longer sucking private equity out of the economy.

                Government deficits are a bigger "tax" on the economy than taxes.

                The reason economy expanded was due to Clinton's balanced budgets.

                As for taxing the "rich" simply getting to progressive taxes that tax wealth will do the trick as those with 60% of wealth pay lowest real tax rate. Inheritance tax for example. Eliminate it and treat inheritance as ordinary income for recipients. Tax the "deferred" billions in Wall St bank bonuses designed to evade taxes.  List is endless. Tax oil to pay for oil wars.  Increase SS tax so it applies to all income.

                If you mean average (under $50K) Joe's income tax and gas tax and SS tax might go up a small amount, yes that might happen but price of good government and sound, growing economy. Look on it as an investment in good government.

                •  holy crap, what is this PUMA horseshit? (2+ / 0-)
                  Recommended by:
                  soros, Azazello
                  1. The national debt increased under Clinton including in the latter years of his team. Clinton "balanced the budget" by having the federal government borrow copiously from itself. It was a delicious mix of creative accounting and Washington doublespeak, but even with the benefit of increased tax revenue from the asset bubble, the national debt never actually stopped growing under Clinton.
                  1. The balanced budgets did not cause the asset bubble. It was caused by technological developments decades in the making. By the way, that asset bubble promptly popped, but given the tenor of your posts, I'm guessing that wasn't a result of Clinton's fiscal policy.
                  1. I won't get into the absurdity of hailing the guy who deregulated Wall Street and set the stage for the current economic crisis as some kind of progressive hero...
            •  geez, vapid cult of personality rhetoric (0+ / 0-)
    •  Clinton "balanced the budget" by borrowing (0+ / 0-)

      It made for a cute talking point, but borrowing from the Social Security trust fund didn't actually do anything to resolve the country's long-term fiscal problems.

  •  Importing goods cheaply from overseas (0+ / 0-)

    raises the standard of living for Americans.

    This is obvious.  

    So why is our standard of living dropping?  I suggest it is our rising population outstripping our resource base.

  •  There's only one good thing (1+ / 0-)
    Recommended by:
    Azazello

    about going broke as a country.

    Our wars will come to an abrupt end.

    Thax for the Diary, Azazelo.

    •  Don't bet on that. (1+ / 0-)
      Recommended by:
      Azazello

      If we go broke (whatever that means), some great leader will come forward and convince us that we need to go to war to get the 'good life back.' We are potentially at a very dangerous point in history.

      Don't squander your youth. You never can buy it back.

      by fredlonsdale on Wed Jan 26, 2011 at 06:58:55 PM PST

      [ Parent ]

  •  interesting diary, Azazello (1+ / 0-)
    Recommended by:
    Azazello
  •  good diary. Thanks for the work n/t (1+ / 0-)
    Recommended by:
    Azazello

    I'm asking you to believe. Not in my ability to bring about real change in Washington ... I'm asking you to believe in yours. Barack Obama

    by samddobermann on Fri Jan 28, 2011 at 03:14:13 AM PST

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