Should Gov­ern­ments run Deficits? a Min­sky Model

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This is a talk about what the eco­nomic con­se­quences could be of Australia’s ambi­tion to achieve a per­ma­nent gov­ern­ment sur­plus of 1% of GDP. I present a very sim­ple Min­sky model in which banks lend money to the pri­vate sec­tor, and the gov­ern­ment both spends and taxes the pri­vate sec­tor. I then explore 4 sce­nar­ios: a bal­anced bud­get; a per­ma­nent sur­plus of 1% of GDP with no change in bank behav­ior; a per­ma­nent sur­plus of 1% of GDP with a sig­nif­i­cant increase in bank lend­ing; and a per­ma­nent deficit of 1% of GDP. The results are not what pro­po­nents of gov­ern­ment sur­pluses expect.

The video starts with a dis­cus­sion of what “The Age of Enti­tle­ment” is, and a rec­om­men­da­tion of George Monbiot’s bril­liant arti­cle on how the Tories are sub­si­diz­ing grouse hunt­ing by clas­si­fy­ing grouse as “domes­ti­cated” or “wild” depend­ing on the tax treat­ment this results in. The mod­el­ing itself starts at about the 8 minute mark.

You can down­load the model from here (right click and choose “Save As”; if you left-click you’ll just get XML gob­blede­gook in your browser) and run it your­self using Min­sky.

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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  • ken

    With Australia’s his­tory of attempt­ing to run bud­get sur­pluses which has only been achieved by asset bub­bles, attempt­ing 1% sur­plus is prob­a­bly going to not be a sur­plus. Any­way we will almost cer­tainly have another reces­sion in the next few years and then our deficit will go out to 6–7% on low growth and infla­tion. In 10 years we may be look­ing at pub­lic debt of 40%. Coun­tries with high pri­vate debt seem to rapidly con­vert it to pub­lic debt when the going gets tough.

    A lit­tle rant. All of what has hap­pened doesn’t reflect highly on the mid­dle-class left. All they were inter­ested in is what the sys­tem could do for them. So it was fine while they were mak­ing money out of prop­erty invest­ments and gov­ern­ments were able to push money into the pub­lic sec­tor. In Amer­ica it is amaz­ing how many areas of gov­ern­ment are unsus­tain­able, with a lot of it hid­den in the pen­sion sys­tem, but all demanded by the pub­lic sec­tor unions. For many the point of the pub­lic sec­tor is to employ peo­ple, not to pro­vide ser­vices to the pub­lic. Many unions around the world have ignored casu­al­i­sa­tion because it allowed them to keep their high-pay­ing jobs, at the expense of younger employ­ees. Much eas­ier than ask­ing for proper taxes and indus­trial rela­tions.

    They have all ignored the fact that it has been get­ting harder for those on lower incomes, mainly through loss of employ­ment oppor­tu­ni­ties rather than low wages. Now that the illu­sion­ary gains of the bub­bles have dis­ap­peared it leaves many peo­ple in avery poor posi­tion.

  • Steve Hum­mel

    Give every­one money. 95–96% will spend vir­tu­ally all of it which is good because it will make the sys­tem func­tion as it is only the­o­ret­i­cally pos­tu­lated to do now., and to the wealthy the addi­tional gift­ing (which yes, they would also get) would be a drop in the bucket. And if you have to reg­u­late a few things also.…so be it!

    Econ­o­mists need to stop being stimid. Their motto should be:

    Trans­for­ma­tion first! Ratio­nal and eth­i­cal regulation…right with it!

  • Steve Hum­mel

    Make that “so timid”.

  • Steve Hum­mel

    The age of shar­ing is dead.” Yes, bravo, that is true. But why pal­li­ate the prob­lem? Drive a stake through the heart of the real prob­lem, the loan only par­a­digm for con­sumer finance, with a direct and uni­ver­sal sup­ple­men­tary income to every­one 18 and over. Then even the age of shar­ing will be transcended….by the age of indi­vid­ual mon­e­tary grace, the free gift.

  • Steve Hum­mel

    Note: The com­mer­cial finan­cial par­a­digm of loan only does not need to be changed, just reg­u­lated to rid our­selves of the insane, uneth­i­cal vices of MBS, CDS etc.

  • glu­bilee

    How does cost of inter­est on debt fig­ure in? In US we pay very low inter­est on debt, but it is still a sig­nif­i­cant cost of fed­eral bud­get. I would think coun­tries with­out their own cur­rency, like Ger­many, Greece, or coun­tries that have to fund from for­eign bond own­ers would poten­tially have more con­cern about inter­est.

  • glu­bilee

    Btw, the US Clin­ton sur­plus wasn’t much of a sur­plus of you put aside Soc Sec trust fund. The FICA tax being col­lected on baby boomers, to bet­ter pre fund Soc Sec for when they retired in a big bulge, that build up of funds to pay Soc Sec benes I future, was counted as govt rev to show a sur­plus. Tech­ni­cally they are all govt tax­ing or spend­ing, but bor­row­ing form a Soc Sec trust fund is money that has to be paid back as surely as for­eign at Tbill own­ers. Yes, the benes could be cut in future, but not likely unless whole coun­try crum­bled 20 years from now. It is one thing to cut unfunded retire­ment ben­e­fits of a deck­ing city employ­ees, it’s another to cut all peo­ple over 62–70 years old ben­e­fits because the govt won’t pay back they money it lent form the find they paid into their whole lives. So polit­i­cally unlikely govt would get away with not pay back Soc Sec trust fund, So Clin­ton fed­eral spend­ing was in deficit, if you set aside trans­fer pay­ments of Soc Sec trust fund.

  • glu­bilee

    Btw, the US Clin­ton sur­plus wasn’t much of a sur­plus, if you put aside Soc Sec trust fund. The FICA tax being col­lected on baby boomers while they were work­ing age. to bet­ter pre-fund Soc Sec for when they retired in a big bulge, that build up of funds to pay Soc Sec ben­e­fits in future, was counted as govt rev to show a sur­plusat end of Clin­ton admin. Tech­ni­cally its all govt tax­ing or spend­ing, but bor­row­ing from a Soc Sec trust fund is money that has to be paid back as surely as to for­eign Tbill own­ers.

    Yes, the Soc Sec benes could be cut in future, but not likely unless whole coun­try crum­bled 20 years from now. It is one thing to cut unfunded retire­ment ben­e­fits of a declin­ing city employ­ee, it’s another to cut ben­e­fits to all peo­ple over 62–70 years old not because trust fund has been run down, but because fed­eral govt doesn’t want to pay back money it bor­rowed from the trust fund, to pay for wars or tax cuts for rich, espe­cially when boomers are receiv­ing no more in ben­e­fits gen­er­ally than what they paid into their whole lives. So it’s polit­i­cally unlikely govt would get away with not pay­ing back Soc Sec trust fund. So money owed to Soc Sec is debt as surely as money owed to investors, just that pay­ment of at debt goes dif­fer­ent places. So Clin­ton fed­eral spend­ing was in deficit, if you set aside trans­fer pay­ments of Soc Sec trust fund.

  • Bhaskara II

    Ken or oth­ers:

    I have won­dered: why a gov­er­ment would want large pri­vate debt or how it could be seen by a gov­ern­ment as beni­fi­cial? If a gov­ern­ment prints and spend it directly benifits by receiv­ing real wealth and labor. But, the pri­vate debt thing is a dif­fer­ent ele­phant.

    Ken´s com­ment might indi­cate that Ken has an idea.

    With Australia’s his­tory of attempt­ing to run bud­get sur­pluses which has only been achieved by asset bub­bles, attempt­ing 1% sur­plus is prob­a­bly going to not be a sur­plus.”

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