Mon 21 Jul 2008
Back from my travels and starting to blog again. Thanks to all the readers who’ve made comments and asked questions.
Given the attention in the press, and among political candidates, it’s no wonder that deficits get so much attention … that they don’t deserve!
Here’s a blurb from a recently published book titled The Great Deficit Debacle, by Joëlle LeClair. “Over the entire post-war period the federal government has consistently run budget deficits, with one major exception, the surpluses from 1998 to 2001. … Despite the fact that in the US, a federal budget deficit is the normal situation, Presidents and Congresses typically aim for surpluses. This misguided policy goal increases the financial fragility of our economy, and recession is the natural result. This book clears up common misconceptions about what policymakers should be doing to … improve the economy’s capacity to create jobs, wealth and prosperity.”
OK. How do deficits affect women’s economic positions?
The federal budget can be in deficit, it can be balanced, or it can be in surplus. The budget position depends on the relationship between government spending (revenues being spent) and government receipts (tax revenue coming in).
Fiscal policies are those that affect the level of government spending and the level of tax receipts, so fiscal policy is always associated with either deficits, surpluses or balanced budgets. But as LeClair notes, the normal state of affairs is one of budget deficits. Before turning to why politicians get their knickers in a twist over deficits, let’s walk through the interaction of fiscal policy and economic activity.
Fiscal policy decisions about spending and taxation change the level of economic activity, chiefly the number of jobs available, consumer spending, and how much firms are investing in new plant and equipment so they can produce more stuff in the future.
Imagine a bathtub filled to just the level you like. In the analogy that follows the level of water in the tub represents the level of economic activity. Water flowing into the tub matches up to the idea of aggregate spending, water flowing out of the tub matches up to the idea of aggregate “not-spending.”
If we open the drain too much, the level of water in the tub will fall: this is akin to a recession or depression.
If the water level is falling, can we open the taps of spending to counteract the draining? Yes we can … and government deficits are the principle mechanism for doing this.
If political leaders sit on their hands during an economic downturn the level of water in the tub will fall. President Hoover was willing to let the economy fall and fall and fall … he was not willing to use government spending power to try to counteract the depression. FDR, within some pretty cautious limits, was willing to use federal spending, financed by borrowing, to try to counteract the depression.
The New Deal and the post World War II prosperity that followed showed us that we can use the economic muscle of government to counteract the boom-bust business cycle, an enduring feature of capitalist economies.
This leaves two questions: what causes water to drain out of the tub? What are the sources of water flowing into the tub?
There are three economic behaviors that cause the overall level of economic activity to fall. When households, businesses and governments “save” water drains out of the tub. When governments collect taxes water drains out of the tub. When imports (what we buy from other nations) exceed exports (what we sell to other nations) water drains out of the tub.
SAVINGS: DRAIN NUMBER 1
Here is one of the first counter-intuitives of modern economics. Savings by households and firms are important, and are a good measure of the economic health of a household or business. But sometimes the volume of savings is too large. When people and firms save too much the level of economic activity falls. Say what? How can this be?
Savings are the portion of income that is not spent, this part of income does not circulate through the economy, it is water leaking out of the tub. When households save they sock part of their income away in 401k plans, buy shares in mutual funds, or make deposits into their savings accounts. But they are not usingthe income they’ve saved to buy stuff at the mall or the grocery store. They are not going to the movies nor are they going out to dinner.
If consumers aren’t buying, firms aren’t selling. Are firms happy? Nope. The first thing a firm can do when faced with declining sales is lay off workers. Now these workers have no income. Can they buy anything? Nope. So sales by businesses will fall even more. You get the picture? A vicious downward cycle of layoffs, less spending, more layoffs can set in.
Business savings work pretty much the same way. The fancy name for business savings is “retained earnings,” these are the earnings that are not paid out as dividends or bonuses. Like household savings, business savings represent income earned but not spent. If the businesses are worried about the future which are they more likely to do: pay out their retained earnings or hold some back just “in case?” This could kick off a downward economic spiral.
Governments (federal, state and local) save (run a budget surplus) when the amount they spend (on schools, parks, libraries, health care, weapons, police, prisons, clean air, or summer recreation programs) is less than the amount they collect in taxes. If the taxes collected exceed the amount spent, then this fiscal decision is adding pressure to the flow out of the tub … government is, on net, taking spending out of the system.
Counterintuitive number 2: If there is a lot saving and banks are seeing lots of deposits then won’t the banks make more loans, and won’t this offset the drain of income out of our tub? Probably not.
Banks do not have to make loans. In fact bankers are notorious for their self-fulfilling prophecies. When times are bad (the level of income is falling, people are losing jobs, businesses are shutting down, bankruptcies are rising, and state governments are cutting programs because they no longer have the tax revenue needed to pay for things) banks become very conservative. They are less likely to make loans. This makes sense … aren’t loan riskier when the economy is tanking? As should be obvious from recent headlines, we can not look to the banking sector for relief when the economic tide is going out.
The bottom line: “too much” savings will trigger an economic downturn. Why? Because income has been earned, but not spent. The fancy name for this is “insufficient aggregate demand.” Taken together households, plus businesses, plus government (plus our foreign trading partners) are not spending enough to buy all the stuff that’s been produced. Firms can’t sell what they’ve already produced, so they slow down their rate of productioin. They lay off workers. Workers lose their incomes. They can’t buy stuff … so there is even less spending in the system and so on in a downward spiral until it stops.
When and why economies recover from recessions depends on government policies.
Take two aspirin, drink plenty of fluids and call me in the morning.
TAXES: DRAIN NUMBER 2
All levels of government impose taxes. No one likes paying taxes. Tax resistance goes back to biblical times, “render unto Ceasar that which is Ceaser’s.” When taxes are collected that money can’t be spent. Typically though, as soon as governments collect taxes, they turn around and spend them to buy things that we cannot buy as private citizens.
If no one in the US paid a penny in federal taxes, where would the spending power come from to maintain the national park system, clean up our rivers and lakes, rebuild bridges, provide public education, or inspect food, mines and workplaces for safety? Governments buy social goods, things that we all want and need, but which we can’t buy as individuals (either because the costs are prohibitively high or because there are no markets in which the goods are bought and sold). The spending would come from borrowing … this is how governments spend more than they take in in taxes.
It does matter how governments decide to spend: pyramids, wars, and espionage do not do much for citizens. Education, public health, parks, highways, police and fire protection, and dozens of other public programs are incredibly valuable to all of us. Many of the services provided by modern governments go a long way to improving women’s labor market opportunities.
I’m sure all of us are aware of how difficult it is for women to go out to work when there are young kids in the family. Absent affordable high quality childcare, women’s assumed (and instutionally reinforced) responsibility for children ties them to the home. Once kids are in school, women’s work options improve. Programs that provide care for the elderly or the chronically ill also improve women’s opportunities to advance their careers. Government subsidies for transportation and housing are also really important to women. Since women earn less than do men with comparable education and skills, government support for transportation helps women (and other lower income workers) afford their commutes to work. Housing supports work the same way.
Net Imports: Drain Number 3
If Americans buy more from the rest of the world than the rest of the world buys from us, than that spending can’t be recirculated through the US economy.Today the international sector is one of the largest flows out of the economic tub. (This is an important topic, and I’ll come back to it soon).
Feminism and Fiscal Policy: the punch line
In a recession economic activity is falling off and the tub is draining. The Federal Government has a legal responsibility to use fiscal policy to maintain the level of employment. (This is codified in the Humphry-Hawkins FullEmployment Act). It is important to protect citizens from the economic consequences of job losses that have nothing to do with their job performance.
When the economy is on a downswing workers are—by definition—losing their jobs. This is precisely when governments should run budget deficits. If government spending causes more income to flow into the tub than is leaking out (via taxes, saving, and imports), this fiscal policy decision will have major positive effects on women’s economic wellbeing.
If the federal government does not step in to slow the leakages out of the economic bathtub, women lose jobs and their incomes fall. For a variety of reasons women tend to be in jobs where they have few protections: they are not unionized, they work part time, and they work in smaller businesses that are very sensitive to economic downturns. (More on this later).
Part time workers are not eligible for unemployment benefits. Since many women work part time the income they lose when they are laid off is not replaced by unemployment compensation. Since women earn less than men, they save less than men. When they lose their jobs they don’t have much of a protective cushion.
Budget deficits are essential to women’s economic wellbeing. Federal deficits support the level of economic activity by offsetting the drains of savings, taxes, and net imports. Federal budget deficits are all that prevent permanent recession and economic stagnation. The most robust period of growth in recent US history is precisely when federal deficits were used most aggressively to maintain full employment.
Why are conservatives against deficits? It’s that power thing. When working people have jobs with some security, they are more willing to confront the power of bosses. Collective bargaining becomes stronger. During periods of high to full employment workers—including women—are usually able to get better wages and more control over working conditions.
Conservatives dress this up in all sorts of fancy argumentation. They are especially keen on comparing government deficits to household borrowing. They love to say, “We have to balance our budgets,” “We have to live within our means,” “When the government borrows we are mortgaging the future.”
The federal government is not a household. Nor is it a business. It can and must deficit finance. The most successful business enterprises in the world all borrow to pay for big ticket items, you don’t seriously think factories are built with cash? Well, the public has big ticket needs too: schools, roads, airports all have to be financed by borrowing. No big deal.
Is deficit financing all we need to get us out of the current economic mess? No. But a strong stimulus package based—estimates from several think tanks put the minimum amount at ±40 billion dollars—is one way we can protect women’s economic wellbeing.