The worst thing about the Federal Government’s surplus may be the
incessant squabbling it has generated about "what to do with the
budget surplus" -- with some preferring "tax cuts", others advocating
"spending enhancements", and still others recommending that we "save
the surplus". Unfortunately, almost all of those caught up in this
debate display little understanding of the nature of a budget surplus,
and still less comprehension of the impact that a surplus has on the
economy. Thus, I propose that we simply abolish the use of the
term "surplus" when speaking of a situation in which the government
takes in more tax revenue than it spends. Let us call it the
"government’s net drain on private sector income", or, better still,
the "great sucking sound as private wealth is destroyed by
government".
In a recent Dismal.com piece, Irwin Kellner rightly questioned
Washington’s projections of $3 trillion worth of budget surpluses over
the next 15 years. Such projections are based on wishful thinking,
creative accounting, and preposterous forecasts of government revenue
and expenditures. The tenuous nature of these projections is not
merely due to the inherent difficulty of making such projections, nor
is it due to a supposed proclivity of Washington to spend down its
"savings". Rather, it is because continued economic growth in the
presence of a budget surplus and a trade deficit requires that the gap
between private income and private expenditure continue to increase
beyond its already unprecedented scale. As my colleague, Wynne Godley,
and I have argued in a recent piece ("Can Goldilocks Survive?")
the only thing that has sustained the current US expansion is the
willingness of the private sector to spend more than its
income -- something that simply cannot continue indefinitely.
At the macroeconomic level, government expenditures generate private
sector income, while taxes reduce disposable income. When government
spending exceeds tax revenue (incurring a budget deficit), there is a
net addition to private sector disposable income. This may well have
secondary and tertiary effects (for example, greater disposable income
may induce household spending on goods produced domestically or
abroad, thereby raising consumption or imports). In any case, a budget
deficit necessarily increases private sector nominal wealth held first
as non-interest-earning cash and bank reserves for the simple reason
that the total value of checks issued by the Treasury to finance
expenditures would exceed the total value of checks written by the
private sector to pay taxes. The Treasury then normally sells bonds
to offer an interest-earning alternative to cash and bank reserves. In
other words, government deficits always add disposable income to the
private sector which is received first as a Treasury check and which
then may be transformed into an interest-earning government debt.
On the other hand, budget surpluses require that tax revenues exceed
government spending. In this case, private sector disposable income is
reduced by the amount of the surplus. Again, there may be further
effects (consumers may slash spending, for example). Because checks
received by the Treasury exceed the value of checks issued by the
Treasury whenever there is a surplus, outstanding cash and bank
reserves will be reduced. To restore cash and reserves, the private
sector sells Treasury bonds. The end result is that the private
sector's wealth declines by the amount of the surplus--with the
reduction mainly taking the form of Treasury debt retirement. Thus,
running a $3 trillion surplus over the next 15 years would mean that
private sector nominal wealth must be reduced by an equivalent $3
trillion.
Can our economy withstand such bloodletting? Our own history suggests
this is highly improbable -- the US has experienced exactly six
depressions in its history and every one of these followed close on
the heels of federal government surpluses that destroyed private
sector wealth. For a more recent example, we can look to the
experience of Japan -- whose recession-cum-depression began with
government budget surpluses at the end of the 1980s.
Those who believe that a surplus can be "saved" for the future, or
"used" to finance tax cuts or spending increases simply do not
understand the nature of a surplus. Does anyone really believe that we
can "save for the future" by burning $3 trillion worth of private
sector wealth? During any period, the government can always choose to
spend more (or less), in which case the surplus over the period may be
lower (or higher); similarly, it can increase (decrease) taxes and
thereby may increase (decrease) the surplus. But, as Gertrude Stein
said, "there is no there there" -- a surplus exists only as a deduction
from private sector income. The negative household saving that some
commentators are finally noticing is merely the accountant’s flip-side
to the budget surplus. A government surplus necessarily reduces
private sector savings and cannot be "saved for the future".
It is very difficult to take seriously any analyses that begin with
the projection that our government will run surpluses for the next 15
years. Part of our skepticism comes from the inherent difficulty in
making projections. More importantly, it is difficult to believe that
our economy can continue to grow robustly as the government sucks
disposable income and wealth from the private sector by running
surpluses. When the economy slows, the surplus will
disappear--automatically and because the private sector will
eventually demand that the government stop draining income from the
economy. Tax cuts will be rushed through Congress and the president
will put forward spending initiatives. When the government decides to
spend more or tax less, that will banish the surplus and result in
more private sector income and wealth. At that point, all this silly
talk of "saving the surplus" will join the Laffer Curve, Rational
Expectations, and Ricardian Equivalents in the dustbin of discredited
intellectual missteps. 
FOR FURTHER READING
(Available from
http://www.levy.org/publications/publications.html)
"Surplus Mania: A Reality Check," Jerome Levy Economics Policy
Note 1999/3, L. Randall Wray
"Can Goldilocks Survive?" Jerome Levy Economics Policy Note
1999/4, Wynne Godley and L. Randall Wray
|
