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Republicans want to cap spending and revenues at percentages of GDP.  This is an incredibly stupid and ignorant idea.  Why ignorant?  Because federal revenues and expenses are highly dependent on the business cycle - one of the hallmarks of capitalism.  Times are good, revenues up, expenses down (less people collecting unemployment, people delaying taking social security), times are bad, revenues down, expenses up.  This is a simple concept that it appears Republicans have never heard.

On the revenue side, corporate income (CI) and capital gains (CG) are highly business cycle dependent - much more so than individual income (II).  Because CI & CG are bottom-line taxes - only profits are taxed, while II is top-line.  By my rough calculation, this adds +- 2% OF GDP volatility to federal tax revenues.  

On the spending side, unemployment expenses go up by about 1% of GDP from peak to trough, so +- 0.5% GDP added volatility.  You have Medicaid and other means-tested programs that would also add volatility (incomes & unemployment go up, less people qualify, economy gets better, fewer people qualify) - these could add another +/- 0.5% GDP volatility.

These are only estimates, but it is not hard to get to a 6% GDP swing from peak to trough in the deficit - this is without any policy changes.  Including policy changes, we've seen about 8-9% GDP delta, which makes sense for the cyclical + policy change elements.

The folly - evidenced by the W tax cuts - is that if you take a balance at the best point as the policy norm, you will have significant deficits in recessions - with IDENTICAL policies.  Policy proposals that don't acknowledge the significant business cycle dependence of revenues and expenses aren't serious.

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Comment Preferences

  •  If I'm not mistaken, the "balanced budget" (2+ / 0-)
    Recommended by:
    jellyyork, katiec

    mantra was most vociferously promoted by Al Gore. I though it was a bad idea then and consider it worse now that I realize it's actually the federal government where all money originates and the strategy of first passing it through the banks so they can get a cut is a scam.

    We organize governments to deliver services and prevent abuse.

    by hannah on Sat Jan 19, 2013 at 05:04:16 AM PST

    •  He did call for that - except in moments of crisis (0+ / 0-)

      which is a vitally important difference.

      Another is that he wanted to continue the Clinton tax rates (for the most part) and use any surplus to pay down the accumulated debt.

      Worth remembering - a moment of irony, #1 in Gore's campaign goals:

      Gore’s 191-page “Prosperity for America’s Families” plan lays out ten ambitious goals within a balanced budget. Their goals include:
      Make America Debt Free by 2012.
      So, yes - he was asking for budgetary balance - but that is a far different thing than what the GOP know-nothings call for today.
      •  When one considers that every dollar is (1+ / 0-)
        Recommended by:

        nothing but a certified IOU, it really isn't possible to be debt free, unless we go back to stealing what we need.

        Now, Gore may well have been opposed to the Treasury taking back dollars and holding them for people to use later while paying them a premium on top of the security service.
        It was, after all, rather scandalous that the Treasury was issuing thrity year bonds in 1991 with a guaranteed dividend of 8.1%.
        If that's what people got for doing nothing but taking their inherited dollars and sitting back, where was the incentive to start an enterprise, expand an industry or develop new products? It's no wonder corporate America converted real assets into cash and then bought Treasury bonds on which they owe no tax. And, whatever the Treasury wouldn't soak up, they gambled in the casinos on Wall Street to gratify the financial engineers and number crunching guys.
        Our economy went virtual -- nothing real. Go to any major city and see the skeletal remains reflected in the rain puddles on asphalt parking lots.
        I used to say it would have been kinder to bomb the South Bronx to smithereens, instead of letting it deteriorate over four decades. I foolishly thought that, like Germany after the War, the people would have been able to rebuild. I overlooked that, although Germany's currency was kaput, the Marshall plan poured in dollars in sufficient amounts to build everything back up and pay reparations to boot.

        First comes the currency; then comes the economy. How did the industrial revolution start? Spain stole the gold from the Americas and then the Dutch secured it in their vaults and issued notes to the Brits.

        We organize governments to deliver services and prevent abuse.

        by hannah on Sat Jan 19, 2013 at 08:39:45 AM PST

        [ Parent ]

        •  Hannah, you should change your tag line to (0+ / 0-)

          We organize governments to issue our currency ;)

          •  I'll think about it. (1+ / 0-)
            Recommended by:

            However, although not so long ago money was referred to as the "last taboo," our currency is getting more attention than all sorts of abuse. Abuse is the object of the money hoarders, those who would sequester the contents of the public purse, the aggressors against women and children and migrants, whether foreign or inter-state. Abuse is the essence of the deprivation of rights and, to our shame, not all abuse is considered a crime.
            I used to think that the appropriate venue for governmental entities are what, in some circles (though not in the online dictionary), are referred to as disutilities:


            The seven 'i's, which are mostly unintended. More recently, I've realized that there is a category of humans that actually delights in tormenting their fellow men, and women, etc. Some exploit because they don't know any better; but some exploit for the fun of it. Other people's distress makes them feel good (powerful). Those people need to be actively countered. They don't kill to eat like natural predators. They don't even kill. They torture. And the culture of obedience makes it legal under the rubric of sacrifice and discipline.
            Money is one of their tools, but there are others.

            We organize governments to deliver services and prevent abuse.

            by hannah on Sat Jan 19, 2013 at 11:04:36 AM PST

            [ Parent ]

      •  Public Deficit = Private Dollars..... (1+ / 0-)
        Recommended by:

        O Deficit = 0 Dollars

        Our dollars are issued to us by the Fed Gov.

        That,s how we can have a private economy.

        We could have a private currency, like Bitcoin.

        But not having a national currency would suck.  Which is why Ron Paul likes it.

  •  A balanced budget (2+ / 0-)
    Recommended by:
    jellyyork, katiec

    or a budget that provides deficits that are lower than our foreign trade deficit, forces the private sector into increasing and unsustainable debt. It can only occur on the back of n asset bubble, and that bubble will eventually burst as happened in 2008. This is an unavoidable reality on a monetary economy. You can't wish it away. Deficits are essential and to say you want to reduce it equivalent to saying you want to curtail the growth of private sector wealth.

    •  I'm pretty sure you're wrong (0+ / 0-)

      The relevant accounting identity is:
      SP = I + CA – Sg = I + CA – (T – G) = I + CA + (G – T)
      private savings = Investment + Current-acount (negative trade deficit) + Deficit

      What happens is that private investment moves towards private savings, not necessarily requiring unsustainable debt.

  •  The total deficit = dollars in the private (0+ / 0-)

    Sector to a penny.

    If you pay the deficit to 0, you'd have 0 dollars in the private sector.

    At the fed level, currency is an accounting entry.  It does not represent real wealth of labor or resources.

    Dollars in the private do, of course.

    When you want to balance the current account balance in order to have a smaller number, there should be a good reason as to why people are being asked to spend their representations of real wealth in order to save the numerical system.

    Which is what the national deficit "borrows" from whenever Treasury "borrows" from The Fed Reserve.

    And may goddess help us as we will be made to sacrifice in order to save the numerical system.

  •  whats 20 million people (0+ / 0-)

    collecting $500/wk 25k per year of UI?

    FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

    by Roger Fox on Sat Jan 19, 2013 at 04:27:20 PM PST

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