{"id":9311,"date":"2010-04-21T19:30:32","date_gmt":"2010-04-21T08:30:32","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=9311"},"modified":"2010-04-21T19:30:32","modified_gmt":"2010-04-21T08:30:32","slug":"the-fiscal-sustainability-teach-in-and-counter-conference","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=9311","title":{"rendered":"The Fiscal Sustainability Teach-In and Counter-Conference"},"content":{"rendered":"

\t\t\t\tIn Washington D.C. next Wednesday (April 28, 2010) there will be two separate events where the focus will be on fiscal sustainability. The first event sponsored by a billionaire former Wall Street mogul under the aegis of the Peter G. Peterson Foundation (PGPF) promises to bring the Top leaders to Washington<\/a>. It will feature a big cast well-known US entities (former central bank bosses; former treasury officials and more). It will be well-publicised and a glossy affair – full of self-importance. It will categorically fail to address any meaningful notion of fiscal sustainability. Instead it will be rehearse a mish-mash of neo-liberal and religious-moral constructions dressed up as economic reasoning. It will provide a disservice to the citizens of the US and beyond. The other event will be smaller and run on a shoe-string. The grass roots The Fiscal Sustainability Teach-In and Counter-Conference<\/a> is open to all and will actually involve researchers who understand how the monetary system operates. Like all grass roots movements it requires support. I hope you can provide support commensurate with your circumstances.
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\nThe Press release accompanying the Peterson event says that the meeting:<\/p>\n

\n… will convene a broad range of senior officials, policy-makers, elected leaders, and experts at the first-ever “2010 Fiscal Summit: America’s Crisis and A Way Forward” to launch a national bipartisan dialogue on America’s fiscal challenges. The Fiscal Summit will bring together hundreds of stakeholders from across the political spectrum with diverse ideas on how to address critical fiscal issues while continuing to meet the priorities of the American people.\n<\/p><\/blockquote>\n

The appeal to diversity is a farce. If you go through the list of participants listed as speakers and identify each name with their public statements over the years and their published output you will soon realise that the diversity involves degrees of deficit terrorism.<\/p>\n

When you explore the PGPF issues page<\/a> you read that their conceptualisation of fiscal sustainability is about a fear of the US federal government “running sizeable deficits” which will continue into the future and the “mounting debt” will “put our nation on an unsustainable path”. They claim that this situation (on-going deficits):<\/p>\n

\n… is the so called “structural deficit”. Absent meaningful entitlement reforms and spending constraints, future tax burdens will have to more than double for the country to get by. Budget controls, program evaluation, spending constraints, and tax reform must be implemented to free up resources to address new priorities and meet new needs. With trade deficits now at twice the previous record levels, and with our low national and personal savings rates, America also has become dangerously dependent on foreign capital.\n<\/p><\/blockquote>\n

They consider the solution to this problem to be “deceptively simple: we should pay for current spending and programs with current taxes, not debt. That would avoid passing on the bill to future taxpayers. Each generation must have the flexibility to set their own priorities according to the opportunities and needs of their time”.<\/p>\n

Once you read statements like that you realise that the PGPF has no idea of what fiscal sustainability is when applied to a nation that issues its own currency and floats it on foreign exchange markets.<\/p>\n

You can gauge how far right the public debate has moved in the last decades by the fact that the term “structural deficit” is now being seen as something bad. I have written about this concept previously. <\/p>\n

It is amazing that a simple concept is now so demonised.<\/p>\n

The federal budget balance is the difference between total federal revenue and total federal outlays. So if total revenue is greater than outlays, the budget is in surplus and vice versa. It is a simple matter of accounting with no theory involved. However, the budget balance is used by all and sundry to indicate the fiscal stance of the government.<\/p>\n

It might be thought that if the budget is in surplus that the fiscal impact of government is contractionary (withdrawing net spending) and if the budget is in deficit we say the fiscal impact expansionary (adding net spending). It also might be thought that a rising deficit (falling surplus) is often considered to be reflecting an expansionary policy stance and vice versa.<\/p>\n

But a rising deficit may, in fact, indicate a contractionary fiscal stance – which, in turn, creates such income losses that the automatic stabilisers start driving the budget back towards (or into) deficit.<\/p>\n

So the complication is that we cannot conclude that changes in the budget balance reflect discretionary policy changes. The reason for this uncertainty clearly relates to the operation of the automatic stabilisers. Please read my blog – Structural deficits – the great con job!<\/a> – for more discussion on this point.<\/p>\n

To provide a cyclically-neutral measure of the fiscal balance some benchmark is required. The Full Employment or High Employment Budget concept was developed to provide this measure of the discretionary fiscal position. More recently, this concept has become known as the Structural Balance.<\/p>\n

As I have noted previously, the change in nomenclature is not insignificant because it occurred over the period that neo-liberal governments began to abandon their commitments to maintaining full employment and instead decided to use unemployment as a policy tool to discipline inflation. So the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) became the mainstream definition of full employment even though it might mean the unemployment rate was around 5, 6, 8 per cent or even higher.<\/p>\n

The Full Employment Budget Balance was a hypothetical construct of the budget balance that would be realised if the economy was operating at potential or full employment. In other words, calibrating the budget position (and the underlying budget parameters) against some fixed point (full capacity) eliminated the cyclical component – the swings in activity around full employment.<\/p>\n

So a full employment budget would be balanced if total outlays and total revenue were equal when the economy was operating at total capacity. If the budget was in surplus at full capacity, then we would conclude that the discretionary structure of the budget was contractionary and vice versa if the budget was in deficit at full capacity.<\/p>\n

While the measurement issues are another matter (that is, how to compute the unobserved full employment point in the economy) the modern notion of the structural balance utilises various dodgy NAIRU concepts in the measurement process. This always means that the estimates of the discretionary fiscal position area always biased upwards (to be more expansionary than they actually are) and so there is always contractionary bias in fiscal policy.<\/p>\n

The result is that modern depictions of the structural deficit systematically understate the degree of discretionary contraction coming from fiscal policy.<\/p>\n

Please read these blogs for further information: Structural deficits and automatic stabilisers<\/a> and Structural deficits – the great con job!<\/a>.<\/p>\n

The other important consideration is that the budget balance does not stand in glorious isolation from other sectoral balances as I have explained often.<\/p>\n

Please read my blogs – Stock-flow consistent macro models<\/a> – Barnaby, better to walk before we run<\/a> – Norway and sectoral balances<\/a> – The OECD is at it again!<\/a> – for more discussion on the sectoral balances.<\/p>\n

The three sectoral balances that are derived from the National Accounts are:<\/p>\n