January 2, 2013

Obama The Great

Update: January 2, 2012

This is in response to the comment below from Lori Filipek. First of all I am flattered by the beginning of your comment where you say,
"I agree with most of your posts and believe you are an extremely thoughtful and reasonable person."
I did review the slide presentation and I encourage all readers to do the same. I try to be reasonable and to remove my personal biases when addressing an issue and I admit sometimes I fail in this quest. Your comment made my day.

I disagree with you that the government must sometimes run a deficit to offset a downturn in the private sector; however, I do agree that many times it makes sense to do so and this is one of those times. You are right that "We are wasting our most valuable resource—people!". The problem is that in the last half century we have run deficits in good times and bad and this is not prudent.

According to the Congressional Budget office Public debt as a percentage of gross domestic product was around 38 percent in 1965. It is around 74 percent now. Debt could approach a 90 percent of G.D.P. in a decade and 247 percent of G.D.P. 30 years from now.

I believe we need a realistic plan to avoid this from happening. I agree the front end of that plan needs to include investing in infrastructure, research and development end education. This will not only help us to be more competitive in the future, but also provide jobs which will help us grow and avoid another recession.

Further, the plan must include making adjustments to avoid the calamities that the CBO is projecting in the future. We are running out of time if we want to remain the dominant economic power in the world. China is catching up with us. Long term planning for us is up to the next election cycle. For China, it is the next 50 years and beyond. 

Our defense budget is equal to the next largest 13 largest defense budgets in the world. China's defense budget is a little over 20% of ours. We need to cut defense and spend more on the resources you mentioned in your comment below; the young girl living in Detroit in poverty who has the possibility of being the next Einstein. We must help her do this not just for her sake, but for the sake of the nation.


  1. I agree with most of your posts and believe you are an extremely thoughtful and reasonable person. However, I must disagree with your comments on “fixing our debt.” I used to believe as you did until some very smart friends pointed out a bit of math to me. The US has a sovereign fiat currency. It CANNOT behave the same as we do with household debt. Our government MUST run a deficit when the economy is hurting. It is a mathematical, accounting identity, just as 1 + 1 = 2. Please see/read the short slideshow:

    Other sources of information on Modern Monetary Theory are the following. (I’ve read lots of articles trying to debunk this theory, but so far, no one has been successful. So now I’m trying to spread the message.)

    Warren Mosler and Stephanie Kelton video "GOVERNMENTS ARE NOT HOUSEHOLDS" (http://www.modernmoneyandpublicpurpose.com/seminar-2.html)

    "Seven Deadly Innocent Frauds of Economic Policy" by Warren Mosler's (http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf)

    L. Randall Wray's blog - MMT Primer

    The Fed knows this, so does Goldman Sachs (http://www.businessinsider.com/goldmans-jan-hatzius-on-sectoral-balances-2012-12#ixzz2GHMSyDm3).

    Congress either doesn’t know this or doesn’t want We the People to know this. The best way to help our economy is a jobs program to fix our crumbling infrastructure and get people back to work. We are wasting our most valuable resource—people!

  2. Dear Stephen, I appreciate your thoughtful response. (btw, I’m from the Detroit area, so I very much empathize with your comments regarding Michigan issues.) I totally agree that our defense budget is outrageous. It’s part of the oligarchical structure that funnels money from the bottom to the top. Our entire society in the US seems to be based on fear and scarcity (of jobs, energy…). Our politicians in both parties, who are funded by Big Money, play their part in maintaining this fear and they tell a false storyline about how our economy really works.

    You wrote: “The problem is that in the last half century we have run deficits in good times and bad and this is not prudent.” I agree that I dislike HOW our money has been spent, but your comment makes me think you didn’t get the point of the links I posted.

    Modern Monetary Theory (MMT) has two components—the first is descriptive and the second is prescriptive. It’s the descriptive part that we first need to agree on, and is the source of most people’s misunderstanding. Do you agree with that? If not, perhaps you (or some of your readers) are a person who likes formulas and numbers rather than charts and pictures. I’ll try again, this time with the accounting identity upon which slides 4 and 5 in the first link are based. Please just read the following short link for the derivation (and the following quote) to see if you agree with the math and definitions. If you don’t, then we need to discuss that in more detail. If you do, then we’re both at the same starting point. Please read http://bit.ly/10tWmhd

    MMT is based on the Econ 101 identity: GDP = C + I + G + (X – M), which it rearranges to get some variation of the equation (X – M) = (S – I) + (T – G).
    “X-M is exports minus imports, or the trade surplus, S-I is private saving minus private investment, and T-G is taxes minus government spending, or the budget surplus. This identity means that the trade surplus is equal to the sum of the surplus of private savings over investment and the government budget surplus. Remember, this is an accounting identity, it must be true.

    Note: In the link, Baker uses the standard definition that GDP = GDI (which he labels “Y”), i.e. GDP must be equal to the total income “Y” generated in production. (I had two initial difficulties with the write-up. Baker states “divide Y” when he actually means “separate Y into component parts.” He also uses “YD” for that portion of Y that is disposable income, rather than Y with a subscript D. At first I thought he meant Y*D. Problems due to my math background…)

    If we agree on the math, then we can discuss what happens when various terms in the eqn are changed. However, before we can discuss ways to change our present situation to the benefit of both the US people and the global economy, we need to come to an agreement about how the US and other fiat monetary systems actually work. i.e. Do you agree with the math in the descriptive part of MMT?

  3. I am not good at math. There is a reason economics is considered a social science. It is because not everything that affects how the economy will perform can be reduced to a formula.

    There is a point at which too much debt, and the debt service that goes along with it, will stymie growth and lower our standard of living. Further if debt gets too far out of hand the cost of borrowing will increase and potentially the economy could collapse.

    We are not there yet but it is time to address the problem with a long term plan to get it under control.

    Right now we need a plan that includes stimulating the economy now and lowering our debt later. We need to provide both parts of the plan now to instill confidence in the market.