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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11 Responses to Should Governments run Deficits? a Minsky Model

  1. Pingback: Should Governments run Deficits? a Minsky Model...

  2. ken says:

    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.

  3. Steve Hummel says:

    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!

  4. Steve Hummel says:

    Make that “so timid”.

  5. Steve Hummel says:

    “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.

  6. Steve Hummel says:

    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.

  7. glubilee says:

    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.

  8. glubilee says:

    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.

  9. glubilee says:

    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.

  10. Bhaskara II says:

    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.”

  11. Pingback: Debt 101 | Borrowing Ideas

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