Should gov­ern­ments run bud­get sur­pluses?

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Ask any politi­cian if gov­ern­ments should run sur­pluses and the answer is likely to be a resound­ing yes, with the ratio­nale being that gov­ern­ments should “live within their means”.

Pre­cisely this rea­son was given by the Aus­tralian National Com­mis­sion of Audit, which has been charged by the Abbott gov­ern­ment with the task of sug­gest­ing ways to rein in gov­ern­ment spend­ing. Its first report gave as the very first of its “Prin­ci­ples of good gov­ern­ment” the mantra that gov­ern­ments should:

Live within your means. All gov­ern­ment spend­ing should be assessed on the basis of its long-term cost and effec­tive­ness and the sus­tain­abil­ity of the nation’s long-term finances (Exec­u­tive Sum­mary, National Com­mis­sion of Audit).

The anal­ogy behind this prin­ci­ple is that gov­ern­ments are like com­pa­nies, and should there­fore have strong bal­ance sheets:

For gov­ern­ments, as with com­pa­nies, a strong bal­ance sheet is impor­tant (What should gov­ern­ments do?, National Com­mis­sion of Audit).

To achieve this strong bal­ance sheet, the Aus­tralian government’s goal is to achieve a sur­plus equiv­a­lent to 1 per cent of GDP within a decade and pre­sum­ably to main­tain it from then on…

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Steve Hum­mel

    So if the data doesn’t help, what about the­ory? Here we strike the left-right divide in eco­nom­ics (with, of course, the pos­si­bil­ity that the left and the right are both wrong).”

    Pre­cisely. They both ARE wrong. Aus­ter­ity and profli­gacy are just the two sides to the same wrongly con­flated “why” of money and eco­nomic sys­tems, namely mon­e­tary infla­tion. Mon­e­tary infla­tion is actu­ally an effect of the real cause of our eco­nomic woes which is the inher­ent sys­temic cost push price infla­tion caused by the fact that com­merce in its nor­mal oper­a­tion only cre­ates A in INDIVIDUAL incomes while in the same period it always cre­ates A + B in costs that must be liquidated.…if there is to be equi­lib­rium. Please.…you need to study eco­nomic his­tory Dr. Keen. Dou­glas’ third way is the way out and it was con­ceived over 90 years ago.

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  • ceviche

    Wait­ing for part 2 which hope­fully will can­vass the fol­low­ing.…
    I believe that oper­a­tional and shared cap­i­tal increas­ing or main­tain­ing expen­di­ture need to be dis­tin­guished. Not hav­ing sur­plus exports doesn’t pre­clude a sov­er­eign wealth fund it just makes it more expen­sive in the short term. Actu­ally the “Future Fund” was funded from sur­plus cor­po­rate taxes dur­ing the first com­modi­ties boom and its use is to reduce some future oper­a­tional expenses (pub­lic ser­vice super­an­nu­a­tion).
    A sen­si­ble need for a sov­er­eign wealth fund is to coun­ter­act the deple­tion of non-renew­able resources.
    A sen­si­ble rea­son for SMALL deficits now would be to main­tain effec­tive demand and taxes know­ing that the age demo­graphic bulge will one day level out with a a sta­ble pop­u­la­tion able to repay that debt. If effec­tive demand isn’t main­tained, taxes are less and deficits get even larger.

  • ceviche

    Another issue that might be worth­while can­vass­ing:
    The rel­e­vance of
    a) full reserve bank­ing
    b) pos­i­tive money
    c) nar­row money
    in the bank­ing sys­tem with require­ments of banks and super­an­nu­a­tion funds to hold gov­ern­ment bonds at dif­fer­ent lev­els from time to time.
    Or maybe that is a topic of itself?

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  • Draco T Bas­tard

    Have you seen Kieth Rankin’s The Global Debt Cri­sis? In it he makes an inter­est­ing con­nec­tion — global pri­vate sur­plus (prof­its and sav­ings) equals global gov­ern­ment deficits.

  • Bhaskara II

    Draco T et al.

    Rankin and the online MMT crowd make the same wrong argu­ment.

    In short: the argu­ment sounds like false one polit­i­cal hacks might give make a wash or loss sound like a gain.

    They ignore real tan­gi­ble assets in their trans­actins and bal­ances by only count­ing money and finan­cial assets (“per­sonal assets”). Thus their false con­clusión is a large gov­ern­ment déficit pur­chase (money dilu­tion) increases our finan­cial sav­ings. The rub is we could save in real stuff, that they do not count at all.

    Search the arti­cle you gave for “save”, “finan­cial”, and “tan­gi­ble”. There is no count­ing of the tan­gi­ble.

    http://www.businessdictionary.com/definition/savings.html

    In our gen­eral con­fu­sion over the dif­fer­ence between real wealth (goods and ser­vices) and finan­cial wealth (finan­cial assets), we square the cir­cle by assum­ing that firms, taken col­lec­tively, run per­ma­nent deficits. That is, we assume that there is an inex­haustible desire by firms (and their bankers) to add to their debts – to indef­i­nitely bor­row and spend more than they repay”

    For instance if the gov­ern­ment runs a déficit to buy your 888 tones of scrap cop­per they would say you were richer later hold­ing the money than if you had the cop­per that they don´t count. In other words if you held 888 tones of scrap cop­per they con­sider you hav­ing no wealth at all! In addi­tion they con­sider the gov­ern­ment poorer hav­ing the scrap cop­per and pay­ing you paper.

    They sould account for real assets and real wealth. For instance you could save buy buy­ing pig­gies that mul­ti­ply, 800 tones of steel ingot, rental prop­erty, or a busi­ness.

    We are tan­gi­bly wealthy olny if we have tan­gi­ble wealth. We have real wealth only if we hold real wealth.

    In dou­ble entry account­ing terms things would be much more real­is­tic.

    In account­ing (dou­ble entry book­keep­ing) tan­gi­ble assets are counted in addi­tion to finan­cial assets and liaba­bil­i­ties.

    Tan­gi­ble assets are in the “real accounts” catagory that are com­pleatly ignored by those men­tioned above. They may also be prome­nently ignored by most econ­o­mists. The real asset catagory account for things held out­right.
    Exam­ples of real assets are stuff, inven­tory, cars, trucks, ships, wash­ing machines, books, attained edu­ca­tion, sil­ver, houses, stores, busi­nesses, and real estate. Real assets also include intan­gi­ble assets such as patents and copy­rights. Real accounts account for things usu­ally held out­right, not in the hands of oth­ers. They may be val­ued by the unit of account, i.e. in dol­lars paid but they are tan­gi­ble things, not dol­lars. The excep­tion is hold­ing your own cash out­right, which is counted in the real account catagory. 

    In order to do this cor­rectly each entity should have real accounts. If one lumps sim­i­lar enti­ties into sec­o­tors each sec­tor should have their own accounts. That might ignore intra-sec­to­r­ial exchanges if one does not make them. So, pro­fe­sor keen might have home own­ers with their houses accounted for in the real accounts catagory.

    But, for cash ther is a very good argu­ment that it should not be in the real asset cataory but the per­sonal asset catagory with the cur­rency issuer or accep­tors as the other per­sonal entity. Real assets have no other entity is involved.

    Finan­cial assets are in the “per­sonal accounts” catagory. A trans­ac­tion with a coun­ter­party, the counter party is the “per­son”. The “per­son” could be a per­son, busi­ness, or other entity. This catagory includes our assets put into the hands of other “per­sonal” enti­ties and into an entity from other “per­sonal” enti­ties. Exam­ples are buy­ing or sell­ing stock cer­tifi­cates (money exchanged for cer­tifi­cates and div­i­dends), loan­ing money, bor­row­ing money, trans­fer­ing your per­son­aly owned seago­ing ship to a ship­ping com­pany in exchange for stock and div­i­dends, buy­ing or sell­ing bonds, goods sold on credit, putting money in the bank, putting money into a retire­ment fund. Notice here, an other entity is always involved. 

    Notice the two assump­tions. They are acu­tally false. Firms could hold accu­mu­lated profit in tan­gi­ble form rather than in the form of finan­cial assets. These assump­tions could fal­si­fied with data. You have research funds I can test the first assump­tion for pub­licly traded firms on the exchange. 

    In con­clusión prop­per account­ing includes trans­ac­tions and bal­ances of real assets in addi­tion to finan­cial assets. 

    Google books:
    “Com­pre­hen­sive Finan­cial Account­ing XI”, S. A. Sid­diqui, A. S. Siddi, p. 81–82

    Basic Account­ing”, Sofat & Hiro p. 42

    Mod­ern Acc. Vol I, 2E”, Mohammed , sec 2.4

  • Bhaskara II

    Cor­rec­tion:

    In short: the argu­ment sounds like false one polit­i­cal hacks might give to make a wash or loss sound like a gain.

  • Bhaskara II

    Cor­rec­tion: The quote should be together with with the fol­low­ing para­graph.

    In our gen­eral con­fu­sion over the dif­fer­ence between real wealth (goods and ser­vices) and finan­cial wealth (finan­cial assets), we square the cir­cle by assum­ing that firms, taken col­lec­tively, run per­ma­nent deficits. That is, we assume that there is an inex­haustible desire by firms (and their bankers) to add to their debts – to indef­i­nitely bor­row and spend more than they repay” 

    Notice the two assump­tions. They are acu­tally false. Firms could hold accu­mu­lated profit in tan­gi­ble form rather than in the form of finan­cial assets. These assump­tions could fal­si­fied with data. You have research funds I can test the first assump­tion for pub­licly traded firms on the exchange. -

  • Bhaskara II

    From the arti­cle ref­er­enced: “We observe that these assump­tions are untrue, not least through Japan’s expe­ri­ence in the 1990s. But we con­tinue to assume that these assump­tions are true…” 

    Act­ing like a,?? (Baka), idiot (in Jape­nese). Who are the “we” men­tioned?

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  • check­mate

    Who­ever thinks that run­ning con­tin­ual govt sur­pluses is a good idea needs to be lined up and shot as an idiot.
    The ques­tion is who sup­ports who here ? A govt that is the cur­rency issuer or the pri­vate sec­tor that relies on cash injec­tions in order to grow. 

    A govt sur­plus equals a non govt deficit. How will the non govt sec­tor go with less money in it every year ? not good.

    The Com­mon­wealth Govt. is not like a house­hold or a busi­ness where it should cut and skimp. Too many idiot politi­cians are ter­mi­nat­ing ser­vices say­ing we sim­ply cant afford it .… well we could afford WWII couldnt we ? even if WWII went for another 10 years. 

    And has any­one ever both­ered to look up our his­tory to see that the govt only achieve one small sur­plus in 1947–48 then the next was dur­ing the Hawke years. Ummmm how did we man­age then to pay down the debt ???? 

    Answer = Grow the Frig­ging econ­omy !!! … thats how. 

    It what we should be doing now and not cut­ting every­thing we can. Aus­ter­ity doesnt work, go and look at the dis­as­ter that is Europe.