A reply on a Krugman article (http://krugman.blogs.nytimes.com/2011/08/12/the-cracked-conservative-mirror/) stated this, and I just can't wrap my mind around it:
Private sector cannot realize profits in monetary sense unless the govt issues the appropriate deficit, a conclusion that is mathematically true, but which "free marketers" absolutely hate. http://www.levyforecast.com/assets/Profits.pdf Government deficits are necessary for economic growth, period. http://www.tnr.com/article/politics/93365/no-long-term-deficit-problem
Is this guy making any sense?
I don't think he makes sense. He seems to assume that the economy works like a zero sum game and that corporate profits represent money taken out of circulation, "requiring" the government to inject more money in via deficit spending/printing press.
Notice how the author launched right in with the assertion, "As every entrepreneur knows, employee costs are a major influence on a firm’s profits. Cutting payroll expenses means a more robust bottom line." Yeah right. Google, Microsoft, Apple... all must pay chicken feed according to the author. He's a Keynesian non-entrepreneur pontificating on how entrepreneurs do what they do.
This is akin to MMT stuff. Have a look here and here. (especially the comments in the last one. Have a look at the discussion I had with the guy.)
For Austrian discussion of this insanity, see here:
The Upside-Down World of MMT
An Austrian Critique of MMT? (this one was started before the above article was published and includes more links)
MMT redux
Can Government's Finances Be Compared to a Household's?
Oh, wow, it turns out that we can print our way to heavenly bliss!
I haven't read the criticisms that John posted yet, but the idea seems pretty sensible to me.
First, combine everything into two entities: government sector and private sector.
Imagine the government sector runs a deficit of $100. The government's balance equals -$100.
For every debt there is an equivalent amount of credit. Since the the private sector is the only other entity, the private sector's balance must be +$100.
Thus, private sector surplus equals government deficit.
The government finances its debt by issuing bonds. What is meant by private sector surplus is the value of bonds in circulation, which is necessarily equal to the government deficit. Where you might be confused, is the poster's use of the word "profits." MMTers do not believe that individual businesses can't realize profits without government deficits, rather they believe that the private sector as a whole can't realize profits (i.e. a surplus) without government deficits.
That government deficits are necessary for economic growth applies if you are measuring economic growth in monetary terms. Since all money held by the private sector is credit, government can't issue money without also creating debt. The money supply can't increase without an increase in debt.
Replace "govt" with "Joes Car Wash" and you get the conclusion that there can be no profit for the country as a whole unless joes car wash is trillions of dollars in debt
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Fool on the Hill:I haven't read the criticisms that John posted yet, but the idea seems pretty sensible to me.
You should read some. Particularly the The UpsideDown World one. You're making the exact same mistake Murphy outlines. You're confusing accounting identities with behavioral laws. He actually uses a similar hypothetical to the one Dave presents. Have a look.
He actually uses a similar hypothetical to the one Dave presents.
I knew I'd seen it somewhere.
No. If you are going to replace "government" with "Joe's Car Wash" then you also have to replace "private sector" with "non-Joe's Car Wash." In which case, it would certainly be true that non-Joe's Car Wash couldn't run a surplus without Joe's Car Wash running a deficit. When everything is divided into two, a surplus for one must necessarily be a deficit for the other.
I read that article, and nowhere does Murphy call what I did a mistake (where did I even address "behavioral laws"?). He basically concedes that "private sector surplus equals government deficit." He argues that government deficits are bad for other reasons. But I never ever addressed that point, nor did the quote in the original post. Imagine if the quote had said, "if you take two apples from Charlotte, she will have two less apples." Then everyone replies, "That doesn't make any sense! You Shouldn't take two apples from Charlotte!" I'm amazed at how often Austrians seem to reject factual propositions because they think acknowledging it somehow entails an endorsement of some sort of normative proposition.
I guess I should spell it all out. If you think the only transactions in this world consist of shuffling money from one owner to another, then indeed A cannot have more money in his wallet unless B has less money in his wallet.
But that is not at all what profit is about. Because neither A nor B made any profit when A borrowed from B. It is a loan. It will be repaid. A having more is a temporary situation. Do you think that Apple and other profitable companies just sit around borrowing money from someone? Is that what makes them profitable? The mind boggles at such thinking.
True profits do not require A borrowing anything from B. What happens is that A profits by being productive. Not by borrowing money, not by the govt running a deficit, not by anything related to money at all. A makes stuff that people want. If they want it so badly they are willing to pay him more than he laid out in making it, he can sell it for a profit. [Of course, money need not enter the picture at all. A might have a bunch of wooden logs nobody will give him anything for. If he whittles them into a usable canoe, he may find someone willing to trade with him, taking the canoe and giving A a cask of beer. A has profited from his labors].
Indeed, it possible for everyone to make a profit in an economy. A makes canoes, B makes beer. Before they labored, they could not trade the wood or the water and hops etc for something they wanted. After they work and make a canoe and a cask of beer, they can trade it for stuff they want. Both have profited.
If money is involved, A has $2 worth of wood before he works. After he works he has a $200 canoe. He has profited $198. I leave it as an excercise to make up numbers for B and his situation.
None of this requires a govt, or money, or debt, or deficits.
Fool on the Hill:He basically concedes that "private sector surplus equals government deficit."
He does no such thing. A "nation" comprised of 100 farmers is perfectly capable of creating a surplus (more wheat, cattle, apples, watermelons, barns, and houses than they had a year ago as a whole) without a government creating any deficit against it, or without any government at all, for that matter.
Imagine if the quote had said, "if you take two apples from Charlotte, she will have two less apples."
That's quite profound. Does this theory have a name?
Fool on the Hill:I read that article, and nowhere does Murphy call what I did a mistake (where did I even address "behavioral laws"?).
Then you obviously didn't read it close enough because the majority of the article is explaining how "the fundamental problem with relying on macro-accounting tautologies [is] people often bring in causal arguments from economic theories without realizing they are doing so."
He basically concedes that "private sector surplus equals government deficit." He argues that government deficits are bad for other reasons. But I never ever addressed that point, nor did the quote in the original post. Imagine if the quote had said, "if you take two apples from Charlotte, she will have two less apples." Then everyone replies, "That doesn't make any sense! You Shouldn't take two apples from Charlotte!" I'm amazed at how often Austrians seem to reject factual propositions because they think acknowledging it somehow entails an endorsement of some sort of normative proposition.
Uh...the OP says: "Private sector cannot realize profits in monetary sense unless the govt issues the appropriate deficit, a conclusion that is mathematically true, but which "free marketers" absolutely hate."
You said "seems pretty sensible to me."
Again, he spends the majority of that article proving how that isn't sensible.
First, I am going to substitute surplus for profits since that is more precisely the counterpart to deficit. Now what constitutes a loan? Something you must give back or something that can only be exchanged for something from the same party? If the former, then I suspect MMTers would contest that the government's deficit constitutes a loan. They don't believe the government must give back the money. As for the second, let's look at the Apple scenario. Apple creates a surplus of money by creating a deficit of goods (i.e. non-money). This transaction also makes non-Apple have a surplus of goods and deficit of money. What can Apple do with its surplus of money? Only one thing: exchange it back to non-Apple for goods. Thus, in this sense, Apple's profits do represent a form of credit, a form of borrowing and lending.
If the results of productivity can be considered a surplus, then there must be an offsetting deficit. If the canoe can be considered a surplus, then the loss of the wooden logs would be considered a deficit. Of course in this example, it's not really possible to convert the latter back into the former. You say that A has profited from his labor. Thus, his labor (along with the lost logs) represents his deficit. There cannot be a surplus in one area without a corresponding deficit in another. Surpluses don't just appear spontaneously.
True, everyone can profit if their profits are measured in different things. But when we talk about a surplus and a deficit, we are concerned with the relation of a particular entity between two parties.
I see why you didn't finish this example. Here you actually began to look at the relation of a single entity among two parties. If you followed through on the example, you would see that the exchange creates a surplus of money for one person and a deficit of money for the other.
Let me use an example that Austrians would like. Let's imagine an economy without any currency. How might a state create currency initially? How about the government agrees to hold private sector gold and issues notes in exchange. Let's say $1 equals 1 lb of gold. The private sector gives the government 10 lb of gold in exchange for $10. Now, has the government run a deficit? Yes! The government owes the private sector 10 lb of gold. The government is 10 lb in debt. Thus, the only way that the money supply can increase, the only way that the private sector can realize a surplus of gold, is if the government takes on more debt in gold. Likewise, the private sector can only realize a surplus in money (that is, not possess money but have money credited to it) is if the government takes on more debt in money. Of course the private sector can have money without there being a government, but if there is a government and if that government can be said to run a deficit, then it must also be said that the private sector is running an equivalent surplus.
If the title of this thread is really false, then tell me: what is the equivalent surplus of the government deficit? If the US government is $10 trillion in debt, then who does the $10 trillion credit go to if not the private sector?
Then what do you make of this?
As a free-market economist, I don't need to run from this tautology. I can use it to underscore the familiar "crowding out" critique of government deficit spending. Specifically, if government spending (G) goes up while tax revenue (T) remains the same, then the left-hand side of the equation gets bigger as the government budget deficit grows. So the accounting tells us that the right-hand side must get bigger too. It may happen partially because people cut down on consumption and save more (due to higher interest rates and their expectation of higher tax burdens in the future), but it may also happen because private-sector investment goes down. In other words, as the government borrows and spends more, the equation tells us we might see lower private consumption, rising interest rates, and real resources being siphoned out of private investment into pork-barrel spending projects. I can tell my "story" of the dangers of government deficit spending with that equation just fine.
Can you point me out the part of the article where he says the government defict (in money) equals something other than net private savings (in money)? What does he say it equals?
I agree with pretty much everything you've said, but the fact that the private sector can not make a profit in dollars without the government running a deficit in dollars does not at all imply that deficts are necessary for economic growth.
The equation is true, but the wording is incorrect. If instead of calling it "surplus" and also calling it "profit", as you have done in earlier posts, you called it "damaged" or "loss", then we would alll be on the same page.
Thus, privated sector damaged= govt deficit. Yes, that is absolutely true. Or private sector loss= govt deficit, that's true also.
Mises defined a monetary crank, or what we would call a monetary lunatic, as someone who suggests a method for making everybody prosperous by monetary measures. To see if you understand AE [even though you may disagree], can you explain why he made such a statement? Do you know how he thought everybody can prosper?
In the example you gave, of the govt taking away private sector gold and handing them paper money in return, I cannot call that "the private sector realizing a surplus of gold". In fact, I find it hard to grasp any sane person calling it that. I could agree to calling it a "loss" of gold, or a "damage" to the private sector gold supply. If you will humor me with that tiny technical detail, then we will be in agreement.
My last post here. Good luck to you.