If the President’s budget were enacted by Congress, and OMB’s projections over the next decade hold, it would almost certainly mean economic stagnation punctuated by recession over the next decade. Would it also mean austerity, however? Let’s see.
The Sector Financial Balances (SFB) model is an accounting identity, and these are always true by definition alone. The SFB model says:
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0.
The terms refer to balances of flows of financial assets among the three sectors of the economy in any specified period of time. So, for example, when the annual domestic private sector balance is positive, more financial assets are flowing to that sector, taken as a whole, than it is sending to the other two sectors. Similarly, when the annual foreign sector balance is positive, more financial assets are being sent to that sector than it is sending to the other two sectors. When the private sector balance is negative, the private sector is sending more to the other two sectors than it is getting from them, and so on.
Now let’s think about austerity. From the perspective of the SFB model, government macroeconomic austerity is medium to long-term fiscal policy characterized by a focus on reducing budget deficits, or increasing budget surpluses, and mostly on the former in today’s environment where many nations have trade deficits. In addition, it involves destroying private sector net financial assets by cutting government spending and/or raising taxes in such a way that Government additions of net financial assets to the non-government portions of the economy (government deficits) fall to a level low enough (even becoming government surpluses) that they are less than the size of the trade balance, whether in deficit or in surplus.
For example, if a nation has an annual trade deficit of 1.5% of GDP and the Government runs a deficit of 1%, then that is a step toward macroeconomic austerity, because the private sector balance is then -0.5% of GDP over that period. On the other hand, if another nation’s annual trade balance is in surplus by 2% and the Government surplus is 5% of GDP, then this too is a move toward macroeconomic austerity, since the private sector will have a deficit of 3% of GDP for that year. If those negative private sector balances last for a few years then we can say that moderate macroeconomic austerity is in play, and if such conditions last for several years then we have severe macroeconomic austerity.
What if a nation runs a Government deficit of 4% of GDP and has a trade deficit of 2.5% of GDP over a year? Then the private sector will, in the aggregate, have savings of 1.5%, and there is no beginning of macroeconomic austerity. The same holds if there is a trade surplus of 2.5% of GDP and a Government surplus of 1%. Again, the private sector savings will be 1.5% of GDP and macroeconomic austerity has not yet started.
What about microeconomic austerity? Microeconomic austerity embodies the same idea as macroeconomic austerity, except that it applies to sub-sectors of the foreign and private sectors, rather than to each sector taken as a whole. So, we can have macroeconomic austerity with or without microeconomic austerity, depending on the sub-sector of the foreign and private sector we are talking about. However, if there is macroeconomic austerity, then there must be at least some sub-sectors within the private or foreign sector experiencing microeconomic austerity.
Issues of distribution of financial flows cut deeply here. If a nation’s economy is structured so that some parts of the foreign sector and some parts of the private sector have sufficient economic and political power to direct financial flows from outside and inside the sector disproportionately into their coffers, then macroeconomic austerity may translate into microeconomic prosperity for those sub-sectors, and into even greater microeconomic than macroeconomic austerity for the sub-sectors with lesser economic and political power.
Right now, in the US, the foreign balance is positive: we are sending more financial assets to the foreign sector than they are sending to us (the trade deficit). In FY 1999, the foreign balance has varied from 2.5% of GDP to over 6% annually. Most recently, it has been running at about 2.5%. If present trends continue, and the Government sector adds less than 2.5% of annual GDP to the domestic private sector through deficit spending, then it will be losing wealth year after year and we will have both aggregate macroeconomic austerity in that sector, and micro-economic austerity in some of its sub-sectors.
Which ones? We know from various studies of inequality (see here and here), that over the past 35-40 years, the American economy has delivered its financial growth disproportionately to large corporations, especially in the FIRE, energy, information technology, defense, and health care sub-sectors of the economy, and also to households either already wealthy, or deriving their income from large companies in these sub-sectors. The vast majority of households have been either barely holding their own or are losing ground economically. These trends have accelerated since the crash of 2008, since most of the gains from the “recovery” have gone to the already wealthy, the bailed out FIRE sub-sector, and the other sub-sectors and households listed above. Here it’s important to realize that since 2009 the private sector aggregate balance has averaged +7.5 % of GDP, with very little “trickle down” to the 99%. The trend over the past year is declining, however, and has dropped to around +5 %, still a substantial level of macroeconomic private savings not seen since the early 1980s.
Here are the projections based on the OMB 2015 budget recently published by the White House, and on quarterly time series data kindly provided in Spreadsheet format by Professors Scott Fullwiler and Stephanie Kelton.
Table One: Sector Financial Balance Projections 2015 – 2024
Compare that figure to the mean of approximately 7.2% of GDP for the 6 year post-crash period of fiscal 2009 -2014. Consider also that Government injections resulting in an annual average private sector surplus of 7.2% of GDP over that period haven’t created enough aggregate demand to produce a strong economy with rapid job creation, full employment and widespread prosperity. Instead, these surpluses have only been enough to end the recession and produce a slowly growing stagnant economy, whose rewards are vast for the already wealthy and for large corporations, but are miniscule or non-existent for everyone else. And then ask yourself the question of what the result of the projected small Government deficits over the next decade in the 2015 budget, resulting in mean private sector savings of 1.2% of GDP is likely to do?
My answer is that the President’s budget plan, if enacted and followed, would first produce microeconomic austerity for the 99% with flat or shrinking aggregate demand, and then continued and exacerbated economic stagnation compared to what we’re seeing today. We will also see rapidly increasing economic inequality, resulting eventually in renewed recession whose time frame would be determined by the willingness of the private sector to extend credit to increasingly hard-pressed consumers and small businesspersons.
The bottom line is that microeconomic austerity in the United States won’t end if the President’s budget or others like it or even more tight-fisted are enacted. But, on the contrary, such budgets will mark the beginning of severe microeconomic austerity in the United States leading to even more severe suffering than we’ve experienced so far and to social turmoil and political unrest.
And well it should, since none of the deficit and debt terrorism and miserly fiscal policy reflected in the President’s budget is necessary, because there is no shortage of Federal fiscal capacity in the United States, and no justification for the fiscal policies the US Government has followed since the Recovery Act. There is nothing but the political intention and will lacking to make our economy work for everyone. To create that intention and will we must replace every elected official in the United States if that’s what we need to do. And we should not stop replacing them until we find representatives who will enable us to create that just and fair economy that is our right!
Nice post, Joe. I think in this sentence ” In FY 1999, the foreign balance has varied from 2.5% of GDP to over 6% annually.” you meant to say “Since 1999…..”
If we are not able to replace our elected officials gradually as you suggest, conditions are likely to deteriorate to the point where they will all be replaced at once, and who knows what form of government we would have then.
Indeed, Sun. Thanks for the correction.
By your macroeconomic definition – the only reasonable way to interpret the rhetoric – the “era of austerity” ended in 2000, and has not returned. Obama obviously uses a different definition.
By your microeconomic definition, the era of austerity is “all the time”, since some industries, firms, and households are always in decline, even if the general economy is robust. That definition is meaningless for purposes of macroeconomic policy, even if it would be the guiding principle for policy designed to enforce equality regardless of macroeconomic conditions.
If the past 5 years are to be called the “era of austerity”, then its definition must include historically high federal deficits and high private sector surpluses. That’s what we’ve had since the end of the great recession in 2009. So to end this sort of era is to reduce federal deficits and private sector surpluses. Which, as you show, is what Obama’s budget does. Which continues the trend of the most recent couple of years of the “era”.
Obama’s statement is nonsense. Trying to use it as a basis for a logical argument only yields further nonsense. GIGO.
Nice comment. But, actually, John, the domestic private sector had a negative flow of funds from the last quarter of 2004 through the first quarter of 2008. It then recovered throughout FY 2008, but then went highly positive under Obama, due to the explosion of automatic stabilizer spending.
On microeconomic austerity, it exists all the time in some subsectors, even when macroeconomic austerity is not in evidence. However, as the private sector balance approaches zero, microeconomic austerity effects become more widespread in private sub-sectors, especially since economic and political power are very unequally distributed. So, Obama’s move toward lower deficits is and will be economically damaging for most people.
I stand corrected. When I went looking for the chart, it turns out the one I found was for the UK, not the US. It showed mostly positive quarters during that time.
But, even better. Instead of starting in 2009 or 2010, the macroeconomic era of austerity actually ended in 2008 !!
For the US, yes. I haven’t looked for the UK, but I suspect that Cameron has been imposing devastating microeconomic austerity.
Joe, it seems the economic perspectives of MMT need a broader base and a message that is easily understood and that resonates with the voting public. The Tea Party and Occupy movements are clear indications of how this can be done, albeit imperfectly. There is great awarenes of the growing microeconomic sector imbalance in our economy, but few grasp the cause and effect, and are blinded by the sound bites of their respective parties’ propaganda.
Geoff, what can I say? We’re all trying to spread the word as best we can. We need all the help we can get.
Yeah, I didn’t mean that as a criticism. You guys are doing a great job! I’m just thinking out loud about how we go from here. What’s the grass roots message, and how do we get it out there, and who are the key influencers in politics, media, etc.
I wonder if a theme of “It’s our money – we want it back” might be useful to build on to begin claiming back the use of the monetary system for the public good…
I like the “meme,” but people have to begin to believe it. To get that belief, we really need prosecutions, indictments, and convictions of the FIRE sector people, badly. Most big businesses cheat. It’s SOP. To justify taking it back we need the facts about control frauds to become very public.
I also didn’t think you were criticizing us. But I did think it important to make clear that it’s hard to create efforts that break through the screen created by Peterson and others who have plenty of money to spread neoliberal propaganda. We’re making progress and we’ll keep trying. But we sure could use something like this to counter the influence of big money on public opinion and politics.
And Rand Paul is an early favorite for the GOP…with guys like Christie floating around (he strikes me as the “lets cut gov, but only social spending!” type. Dems are only marginally better, allowing us some scraps but still adhere to the budget balance, wanting to recreate those glorious Clinton years…
Indeed, the Austerity enthusiasm is not dead at all.
Christie would destroy our public schools and give away everything to the plutocrats.
Precisely, (I know too well, I live here in NJ) and since he has been the GOP darling for years now, and the “grassroots” favorite is Rand…I’m afraid you are qutie right, the age of Austerity is not over, even if it takes a brief nap.
Joe, I like your development of micro economic activity having a predictable impact on macro economic outcomes. A criticism from the Right, of Keynes and Krugman and Progressives in general has been the simplicity of tax and spend. In fact there are micro aspects that need specifying since it is the micro use of our money (our system of credit) that define our political economy, including safety-nets, a job guarantee, inequality and taxation. Before we become involved in micro issues one needs to embrace the macro economics of MMT.
A relative and I had a conversation yesterday. Her issue is paying taxes, she has been fairly brainwashed by the WSJ and believes that a tea party patriot is obligated to pay the least amount of tax possible as a member of the 2%. My issue was being conned into switching my energy provider to save a few pennies in the summer as a person relying on SS. The result of the provider swap is a disconnect notice after exceeding the use of electricity to the tune of $1000 in two months. It seems my new deregulated energy provider ( a broker) is charging 31 cents a kw while my old provider is charging 8 cents a kw. My relative does not see the connection between her tax problem and my energy problem. The difference is purchasing energy from a regulated generator in the industrial sector and purchasing energy from a deregulated financial capitalist that mines pools of money.
I hope you found a lawyer. You can’t be the only one, there should be a very profitable class action.
If the private company’s pockets aren’t too deep, and f the judge isn’t mesmerized by market fundamentalism.
Hi Ransome, I think that macroeconomic conditions set constraints for microeconomic dynamics, on the other hand those dynamics feed back to the macroeconomic level in unexpected and emergent fashion which call to mind the “Black Swans” and the crash of 2008. The crash was predictable and was predicted by MMT economists and others, but the timing of its occurrence was unpredictable, because it was dependent on emergent effects.
Speaking of free markets, I see that the prices of housing are rapidly rising because investment groups are buying blocks of foreclosed houses. So the original owners that lost their hard earned equity can start all over, buying at bubble prices. This is an example of Johannsen’s economy impairing investment. Well, we will see. The young new home owners are all loaned up from school.
We need a debt jubilee, among other things.