Thursday, January 29, 2015

How Do Federal Deficits Matter?

Federal deficits matter when they ultimately impose limits on growth and knowledge use, as has occurred since the Great Recession. Rivers of ink have been spilled over the idea that deficits don't matter. If that is so, then why have so many nations cut back on their growth projections for the foreseeable future?? Inquiring minds want to know.

This conversation, courtesy of Brad Delong, is an apt illustration how political wrangling with a constant "Fix the Debt" subtext could ultimately result in fewer knowledge based services over time. While a loss of service formation due to fiscal limits might not bother some, it would bother me immensely. Services need to be subjected to production reform, so that marketplace loss is not a slow motion inevitability. If labor force participation does not successfully shift toward services, other forms of production would eventually become more limited as well.

Governments are limited in the numbers they can hire, much as private industry has also been. As for those who are presently hired, they also need to be able to work and live where these jobs already exist. Eventually, many knowledge based services need to be localized through direct monetary means, so that they are no longer an issue for federal deficits. Fix the debt? Let's fix the missing marketplace, instead. The sooner the better, before even more of the (recent) downshifted growth trajectory is lost.

Washington understandably wants as many fiscal accommodations for the economy as possible. Particularly in the last century, national governments have been able to put their distinctive stamp on much of what has occurred - both at home and on the world stage. But fiscal activity has become a more broad based aspect of economic life than some are willing to concede. As a result, compromise and resolution on many fronts is becoming more difficult by the day.

Deficits often appear quite benign, in part because of the ways they are structured. Many of these government obligations are hidden in today's financial structures and government transfer payments systems - both of which hopelessly skew data comparisons. To be sure, the federal budget has remained fairly stable over time. However, the most recent plan for maintaining that stability has been to slowly cut back on an ill designed healthcare marketplace, and hope the public won't notice. That's a lousy non solution. The main problem for recent government budgets, has been the growing nature of what their obligations now consist of. Circumstance which no longer have a beginning and an endpoint, have crowded out practically all other options.

In many instances, federal deficits of the future may need to be reserved for circumstance which are not ongoing. That also means fewer unnecessary promises to private interests. Governments became bogged down in the twentieth century, by taking central roles in the structures of their domestic economies. While some government activity is always desirable for tradable goods infrastructure, non tradable goods such as housing and services often need to be decentralized. Otherwise, government obligations in these areas only make it more difficult to remain flexible and adaptable in changing times.

The adoption of knowledge use systems could eventually bring a dynamic services marketplace to all. What's more, doing so could free up government budgets for what they are best able to provide. Federal deficits aren't necessarily unwieldy because of their size. Rather, deficits become unwieldy when they grow so complex, that different factions no longer agree on the monetary representation to tend to them. The fact this is now the case, means there is more significance in today's deficits than meets the eye.

Update: an interesting article about the 18 trillion dollar debt:

Also - While I tend to focus on the problem of government debt for operational costs, Dr. Eamonn Butler reminds me that governmental obligations for infrastructure can also be problematic: Munibonds and the National Debt

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