A Guide to the Deficit Aviary

By Rose Cahalan
(Cross-posted from Alcalde)

UT professor James Galbraith is drawing attention for his unconventional position on the U.S. deficit. Galbraith and his fellow “deficit owls” stand apart from the better-known deficit hawks and deficit doves. Hawks think we should act now to reduce the deficit; doves think we should act later. Owls, by contrast, think the deficit isn’t a problem, now or later; it’s just a natural part of growth.

The Alcalde is introducing the concept on its “Big Idea” page of the May|June issue. Here Galbraith explains in more depth what it means to be a deficit owl.

The Alcalde: What is a deficit owl?

Galbraith: A deficit owl believes that the deficit is a result, not a cause, of economic difficulty, and that it’s not something policy should work on directly. In my opinion, the deficit is a symptom, not a disease in itself.

This position is nothing new—it’s only the terminology that is new. The hawks vs. dove language has dominated the conversation for years now, but in reality it has always been a more complex, less black-and-white debate than that. So I’m pleased that this owl terminology has cropped up, because it may be able to help broaden the conversation. This is a question of who’s up and who’s down in various economics departments. The owls go back to a long tradition, starting with John Maynard Keynes.

The Alcalde: What’s the difference between a deficit dove and a deficit owl? Both groups advocate a hands-off approach.

Galbraith: The difference is that the doves say although the deficit is not a problem now, it’s certainly going to be a problem in the future. So they say we should have a stimulus policy now and prepare by cutting back long-term programs.

The Alcalde: Why do you disagree with the doves?

Galbraith: There are two problems with the doves’ approach. One, there’s no evidence that the world is going to have a major problem caused by this question of the deficit. That’s a supposition based on highly unreliable computer programs. And two, if you wanted to do something today about the future budget, the only way to do that is cut vital programs like Social Security and Medicare. You can’t cut things like the defense budget, because that’s decided in the future. So the doves’ formula is one that leaves Social Security and similar programs at great risk.

The Alcalde: What’s the most common misconception about the economy?

Galbraith: The fear that we will go bankrupt. The concept of bankruptcy doesn’t apply to a country like us; the U.S. is going to be just fine, long-term. Europe is another story, because the coordinating mechanisms between countries there are dreadful. The U.S. is more resilient than it may look.

My message is the financial position of the U.S. government is far stronger than a great many people think it is. Recently we’ve been seeing this notion that we’re heading toward some unprecedented, apocalyptic territory. You saw that with the panic over the debt-ceiling issue last summer. But the people who were actually buying and selling treasury bonds weren’t flustered in the least. In fact, bond rates went down.

The Alcalde: What’s your five-step plan for economic growth?

Galbraith: Good question, because I do actually have a five-step plan:

1. Concentrate on restructuring and reforming the financial sector, which was a major source of the crisis. It’s still not fixed.

2. Reduce our reliance on oil. This is a tough one to fix, and I don’t believe in miracle cures, but we have to find alternatives.

3. This step has three components—all relatively small changes that would affect many people. One, let’s recognize that a lot of unemployed people—older people—will not get new jobs. Offering them early retirement would open up jobs for younger workers.

4. Next, let’s raise minimum wage, which discourages undocumented workers.

5. And finally, a right-to-rent law. This would say, if your house is in foreclosure, you can stay in the house and pay rent set by a neutral party and then buy it back in a few years if you wanted, if you could. That would change the incentives facing the banks, which are dragging out this process. They would have a much stronger incentive to renegotiate than they do now.

14 responses to “A Guide to the Deficit Aviary

  1. ‘2. Reduce our reliance on oil. This is a tough one to fix, and I don’t believe in miracle cures, but we have to find alternatives.’

    Nuclear power + electric vehicles + heat pumps = no (or very little) fossil fuel

    This does not require a scientific breakthrough or miracles. These are practical now.

    And, both nuclear power (high-T gas reactors, fast reactors, molten-salt reactors) and electric vehicles (battery research) have a lot of room for improvement. Most problems these days are not technical but social.

  2. Bayard Waterbury

    It’s the deficit, stupid! So goes the mantra of paralysis. This is such an absurd thing, but serves such a profound purpose for our “controllers” who take everything we have, hoard it, store it, and use it to buy more representation. We see it here, every day, and in Europe, every day, this view that austerity must be enforced, regardless of who it hurts (of course, none of its proponents). It is simply a failed idea. So, we allow it to exist, to control, to foul our water and air, to suppress our ideas, to confound our efforts to succeed, not in obtaining riches, but simply to live in any way comfortably. Life is short, we die quickly, but the idea is to find peace of mind, body and spirit for ourselves and those whom we love. If we choose to ignore, not to act, not to care, not to object, not to propose and move forward, it is simply our fault. We can point all of the fingers we want, but it’s time to point at us. Inaction is an action fostered by apathy, ignorance, and laziness. Time to wake up folks, or die. The deficit is essentially meaningless. It’s just a number, just another idiotic number that we are told will destroy us. And, sadly, too many of us see the country as our equivalent household, but, we don’t have our own currency. Think about it, if we each had our own individual currency, accepted by all others, would our debts matter? No. End of story.

  3. I really like Dr. Galbraith’s five-step economic growth plan. Here’s mine:
    1. Abolish the FICA tax.
    2. I absolutely agree with Dr. Galbraith that we must reduce our reliance on oil.
    3. Permanently lower the Social Security and Medicare eligibility ages to 60 (highly inspired by Dr. Galbraith’s third step).
    4. Make the Bush tax cuts permanent, to provide certainty in the economy.
    5. Make private banking illegal in the United States.

  4. Golfer1john

    I don’t understand the right-to-rent part. Wouldn’t a fair rent be higher than the mortgage payment? The landlord also has to cover taxes, insurance, maintenance, etc. If the owner could afford that, why is he in default on his mortgage?

  5. If I could mash up points 4 and 5, check out the Universal Living Wage (like UT, based in Austin).
    “The concept is simple. It is based on the premise that if a person works 40 hours a week, then he/she should be able to afford basic housing. We use two existing Federal guidelines to determine what the Universal Living Wage should be. The first guideline (a HUD standard also used by banking institutions across America) dictates that no more than 30% of a person’s gross monthly income should be spent on housing. The second guideline, the Fair Market Rents (FMRs) are established by HUD throughout the country for each municipality and all other areas. Therefore, the Universal Living Wage will vary per area in accordance with the FMR. FMRs are based on gross rent estimates which include shelter, rent and the cost of utilities except telephone service.”

    So Jamie’s point 5 could be priced by local FMR (or perhaps the 30% of a gross income cap … need to think that one through). As for point 4, the ULW plan is so diabolical because it pits industry against real estate by, in effect, extending Ed Glaeser’s “zoning tax” to also tax payrolls (“By restricting the supply of new apartments, these regulations exert a “zoning tax” on housing prices that is responsible for much of the high cost of housing “).
    If a metro area wants cheap wages, it must provide cheap housing… otherwise the minimum wage goes to the moon (easily tripling in the case of present day DC or San Francisco).

  6. Alex Seferian

    Very interesting post. Thank you. I was hoping that someone with more MMT knowledge than I have could shed further light on the subject of why deficit owls are relatively unconcerned with government debt levels and the sizes of deficits. I am able to grasp quite a bit of the MMT arguments, and they do indeed make a lot of sense. However, the notion that a country can reach a debt-to-GDP ratio of 1,000% (a figure I put out for arguments sake… I am not quoting an MMTer) and still be OK, just doesn’t “feel” right.
    Deficit owls, I am aware, point out that inflation is a key related concern, but at the same time I have not been able to locate in MMT literature much on a subject which I would have thought is key: the actual quality of the spending underpinning a deficit. I am not an economist so I will outline some simple thoughts and questions. Apologies in advance because the comment to the post is a long one.
    I start off by acknowledging that a key argument of MMT is that a sovereign government that issues its own freely exchangeable fiat currency is not constrained in its ability to purchase goods and services that are available for sale in its own currency. This makes sense because the Government is the monopoly issuer of the currency and therefore can technically not “run out of money”, nor become bankrupt in its own currency. However, I have problems when it comes to jumping from this, to the argument that deficits and government debt levels should not be targeted as a matter of policy. Instead, real measures of wellbeing, such as economic growth and employment, should be the centers of attention. My concern is that this view is a bit US-centric, as only the US and perhaps a few other first world countries could “get away with that”.
    To try to better make my point I assume a very simple and poor economy, and I ask whether adopting MMT’s position on debt levels and deficits may not lead this hypothetical country down a sub-optimal road.
    I assume that we locate an uninhabited Island. We populate it and endow it with certain capital goods and equipment. It turns out that at inception this Island can produce enough food and other basic goods for its inhabitants, it only needing to import a minimum quantity of oil in order to power up the infrastructure needed to sustain this state of equilibrium. In this Island the production of food (and other basic goods) is fully consumed, and everybody is employed and content. The economy initially produces no other goods.
    Referring to the financial balances equation, I start off with (S – I) = (G – T) + (X – M). I then assume that the private sector is in balance. I also assume that the Government does not tax much, and the country does not produce meaningful amounts of exports. To keep things really simple therefore: S = I, T = 0 and X = 0. This leaves me with G – M = 0. In other words, the Government spends to purchase oil, which in turn allows the economy to function.
    Can this Island economy be sustained, all other things equal? Well I’ll try to answer that by going through the motions. I assume that the Island is off some coast in Latin America and its Government issues a currency called the LATAM. Unfortunately, the LATAM is a new currency, and while the Government can spend as much as it wants to buy those goods and services that are for sale in its own currency, in this case foreigners are not that keen to sell their precious oil for LATAMs. Therefore, in order to carry out its oil purchases, the Island Government has to exchange its currency for one that is widely accepted internationally in oil transactions; in this simple model, I assume that this currency is the US dollar.
    How could the Island Government exchange its LATAMs into US dollars? It would have to find people or entities that hold US dollars and are willing to exchange these into LATAMs. Who needs LATAMs becomes the key question? I can think of three possible sources of demand: 1) those who want to buy the Island’s exports; 2) those living in the Island and in need of the LATAMs to carry out their local purchases; or 3) anybody keen to hold LATAMs in order to earn interest.
    In the simple model, the country does not export, so option 1 is discarded. Regarding option 2, I assume that the Islanders have initially some US dollar savings and can therefore act as the counterparty to the Government for a while. However, eventually the Islanders run out of their US dollar savings if the process goes on for long enough. That leaves me with option 3. The Island Government would have to offer an attractive interest rate to entice foreigners to hold LATAMs. This could make sense, but only to the extent that the extra LATAMs earned at the end of a period could eventually be exchanged into US dollars, or into real Island goods (and/or services) that foreigners are willing to buy. Option 3 eventually faces the issues of Option 1. Meanwhile, the Government generates deficits and its debt levels increase.
    I think that the Government and the LATAM face a major problem; ultimately, the Island will be unable to import oil and the system will collapse. Its local inhabitants may be better off migrating, unless the Island society: a) finds a way to produce something that the rest of the world wants, and/or b) switches to an alternative energy source that does not require imports (e.g., there is plenty of sun in the Island).
    In this simple example, one can see that sustaining Government spending or focusing on full employment are not solutions in and of themselves. In fact, I dare say that these actions may be detrimental. This is not to say that the deficit or the Island debt is the root problem. The real issue is the initial economic model or set up. However, to the extent that the Government makes available the needed amounts of money each year to buy the oil, then the Government will be helping to sustain something that is unsustainable. Is this a good thing? I would argue that the answer is an unequivocal no!
    As discussed above, the only way that the Government could sustain this artificial economy would be by enticing foreigners to hold increasing amounts of the Island’s currency and its public debt. Failing devaluation, or some form of debt jubilee, the Government’s actions would imply less future Island output for the local population (if the foreign LATAM holders travelled to the Island), and ultimately a possible sale of the Island’s assets to these foreigners. Having the Government throughout the process focus on full employment would have been misguided. The Government would continue to spend, import oil, and keep the system going for as long as markets permitted this to happen. However, it would be “kicking the can down the road”. A more sensible economic policy would be one that promoted a conversion of the Island’s economic model, accepting and even encouraging some unemployment in the process to help foster “creative destruction”. Also, monitoring the Island’s debt level relative to GDP would not be a totally unsound policy. To a minimum that ratio would be sending a signal that something was not entirely working well.
    In summary, and moving to the real world, I would have thought that large persistent government budget deficits (to offset a current account deficit for example) would be unsustainable in the long term, as they would eventually lead to a balance of payments crisis (or currency crisis) – in which the exchange rate value of the currency suddenly plummets, leading to high inflation and other serious economic problems. I understand that deficit owls think that these problems can be avoided with a floating exchange rate and appropriate government policy, but I don’t see how. Can someone please explain this?
    As a concluding remark I’d like to say that I am a fan of MMT. It sheds so much light on majorly important issues that mainstream economists ignore. These economists therefore often generate wrong answers or misguided policy recommendations, especially when it comes to deficits and the austerity phobia that is unfortunately gripping most of the Western world. However, going from that to another sort of extreme may not be the solution, and I sometimes wonder whether it is not indeed an extreme to say that deficits don’t matter. In the end, I would have thought that the key is to look at a number of variables, including debt levels to GDP and deficits, and basically make sure that the real resources of an economy are being wisely utilized… that is what really matters… that plus better controlling financial institutions and ensuring as best as possible that income distribution is fair… a sort of balancing act. Whoever has had the patience to read all of this, thank you! Thank you even more if comments can be made, either confirming that my thoughts make some sense, or telling me that it’s fundamentally wrong.

    • Samuel Conner

      MMT acknowledges that an economy that is dependent on nonsubstitutable imports has less policy space than an autarky would have, and in this situation excessive exploitation of the currency sovereign’s seignorage power can produce inflation due to decline in the local currency with respect to the international currencies in which the necessary imports are priced. If you go through the MMT Primer, you will find this discussed.

  7. Agree with Galbraith’s 1 – 4. But five, I mean really, you couldn’t think of a better option for your top five list?

    I have a really dumb idea, a kind of kill two birds with one stone idea. Maybe, just maybe the Federal government could focus on increasing the income of consumers through freshly created money? And then voila! The mortgagees could pay their bills, like their mortgage. They wouldn’t need a rent to reown program… It’s almost like magic. POOF! And everything was well again. Obama can call it “The American Income Enhancement and Maintenance Act.”

    But what do I know. I suppose I should get my glass of cool-aid and saddle up for a drive right off the austerity cliff in the abyss below. Yeeeehaaaaa!!!!

    Please, somebody tell Randy he needs to go on the Daily Show w/ Jon Stewart–make the rounds on TV discussing the contents of his book. Really. The press has got to be friendly to this. I’d be fantastic. We can all support him, help’m get all prim and proper, ready to fight the good fight. The time is ripe–ripe–right now for MMT’s message. Focus on the basics in layman’s language. Do you want jobs? Do you want a program that will cure the economy which both Democrats and moderate Republicans can support? We need to fund our deficits with freshly created money. Deficits are the government’s mechanism for supporting the income of consumers, of the 99%. And we don’t have to borrow the money to run the deficit. Deficits are healthy, particularly when they are funded with money we can create out of thin air (consistent with the rules, of course). When inflation comes up as a concern, Randy’ll know what to say in rebuttal. The idea is to turn the entire discussion on its head.

    I have my pom poms and wig out, the whole shabang. It’s a good time to lead. Right now the world needs you and your MMT colleagues.

  8. Here are Nine Steps to Prosperity:

    1. Eliminate FICA
    2. Medicare — parts A, B & D — for everyone
    3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita
    4. Long-term nursing care for everyone
    5. Free education (including post-grad) for everyone
    6. Salary for attending school
    7. Eliminate corporate taxes
    8. Increase the standard income tax deduction annually
    9. Increase federal spending on the myriad initiatives that benefit America

    See the above link for more details.

    Rodger Malcolm Mitchell

  9. Thorstein Veblen

    Here’s my 5 step approach to fixing the economy and much of our long-term deficit problems…

    I would fix:
    monetary policy
    monetary policy
    monetary policy
    monetary policy
    monetary policy.

    As a dove my main quibble with the owls is that if we get back to full employment, government deficits do crowd out the private sector, and particularly tradables — since deficits lead to dollar appreciation. These are bad things.

    • Interesting. The debt hawk say deficit lead to dollar depreciation. So now we have both sides of the story.

      The whole argument would disappear if people understood these two fundamental equations in economics: Federal Deficits – Net Imports = Net Private Savings


      Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports

    • Golfer1john

      It would take enormous changes to spending and tax law to maintain a deficit the size we have today if the economy were to get to full employment. Taxes would soar, safety net expenditures would drop off a cliff, and the deficit would shrink dramatically at full employment. MMT does not advocate the same size deficit at full employment that it does at 25% underemployment. The deficit need only be large enough to offset private and foreign savings desires in order to maintain full employment. Anything more than that would be optional, and only done if the economy is at less than full employment and it is desired to goose demand a bit.

  10. Detroit Dan

    Alex Seferian: Your post makes good sense, but does not in the least conflict with MMT. See, for example, Philip Pilkington: MMT, Functional Finance and Dirigisme – Sketch of an Alternative Economic Approach for Developing Economies

    • Alex Seferian

      Detroit Dan: Thank you. The post is very interesting and I didn’t know about “Naked Capitalism” so I am going to start subscribing. I think that France, however, is not the best example of a country that started producing imported goods in order to keep devaluation and inflation in check; I question whether this is truly a successful case of a developing nation implementing an MMT (or functional) approach to budget deficits. After WWII, France’s success was mainly the result of the Marshal Plan (as you will recall, this was major support that certain European countries received from the USA). To a minimum, the aid received hugely distorted reality. Without US aid would France have done so well? I doubt it. I think that Latin America is a much better example of what the author of the post is trying to explain. There, “Import Substitution” policies were in vogue and all the rage during the 1970’s. US aid was minimal. Unfortunately, however, in these cases “dirigism” did not contribute to healthy economies to say the least.

      To the point that my post above does not conflict in any way with MMT, I am glad, because I truly am a fan. However, I attach an interesting video that makes me wonder whether there may not be some differences when it comes to what the theory should or not emphasize, and in what manner. In the video below Stephanie Kelton explains what “deficit owls” consider to be important regarding government deficits. In my humble opinion some of these comments are a bit US-centric.

      Consider Spain for example. One reason it ran Government surpluses before the crisis was because of huge windfalls it received thanks to the real estate bubble. Municipalities could earn up to 10% of the value of real estate investments (due to taxes and other required payments). Under these circumstances, it was relatively easy to maintain the EU’s 3% budget rule as well as grow employment. In fact, 1 out 3 new jobs in the EU were generated by Spain for many years before 2008. Immigrant workers flocked in from Romania and Poland, to name a few countries. However, the Spanish Government’s surpluses masked a great deal of inefficiencies, including massive investments in not very necessary infrastructure, e.g., alternative highways in and out of some cities, with barely a car to be seen using them now-a-days. My point is that there was a great deal of waste built into the rosy budget surplus figures, and that this was in part the problem. The bubble was created by the two sectors, as both the private and the public sectors were in on it together on a host of fronts. Corruption and fraud were rampant. “Dirigism”, or lack thereof, produced the bubble and the massive amounts of debt that are making the “pain in Spain” far greater than it would have been otherwise. An MMTer focused on employment and economic growth would have not seen the problems brewing before 2008. An MMTer focused on that, and also analyzing in detail what the Government was spending its money on, and what sort of economic model it was promoting, would have had a much clearer picture.

      And therein lies my main concern with MMT. At least as far as I have been able to see, not much is covered when it comes to encouraging readers to also be skeptical about deficits and assess the quality of the governments and their expenditures. To the extent that a country has a flawed or inefficient economic model, some of the policy recommendations that are derived from MMT, may actually help “sustain the unsustainable”; kick the can down the road, rather than allow some “creative destruction” to kick in.

      My US-centric point is based on my belief that the US is truly a great country (I am not an American by the way). There, MMT may be a more realistic theory than in other countries — lesser performers so to speak. A backbone of MMT is I believe that responsible people are running the Government, and the fact is that politics has a track record of attracting some very unique characters, especially in places like Latin America, including Argentina (where the author of the post you recommended amazingly suggests that political leaders should be more “dirigist” than they already are with import substitution). This is all not to say that all politicians are bad, or that the private sector is full of saints… on the contrary as we have seen and judging from Bill Black’s materials. At the end of the day, it all boils down to people, and the extent to which they are ethical, honest and intelligent. There are good and bad politicians in all countries, and also good and bad bankers, workers, and entrepreneurs. There are good and bad lawyers and judges. Having said all that, my bottom line is that I firmly believe that applying MMT in certain countries is much more “easier said than done” than in the US.