Tag: Government

Reframe The Debate

It is important to recognize changes in the seasons. Our country is undergoing a significant metamorphosis, which is likely to last several years, but we have an opportunity to help ensure that what emerges from this turmoil is more beautiful than what preceded. While there are plenty of problems we can dwell on, at the same time there are a number of very positive changes occurring that I believe are laying the groundwork for a better future. It is now our collective job to work toward making that happen.

One of the big shifts going on is in the economic arena, and it will have profound effects. A fresh perspective on the role of our nation’s currency is set to reshape the debate on public policy and government budgets. If you are not yet familiar with Modern Money Theory (MMT), it is time you get up to speed. A good place to start is with the work of Stephanie Kelton. Her recent New York Times piece How We Think About The Deficit Is Mostly Wrong provides an excellent introduction to this shift in thinking.

The Patriotic Millionaires have a powerful message about restoring political equality, fair pay for workers, and ending tax giveaways for the wealthy. However, we too must be careful not to fall into the trap of framing tax reforms and public policy in ways that reinforce the narrative that our government is fiscally constrained. It is not, and never will be.

Let me be clear. Raising taxes on the wealthy does not give our government any more spending power than what it already possesses. Whatever Congress authorizes is “affordable” since our government is self-financing. The Treasury and Federal Reserve coordinate to make all payments that Congress authorizes, no matter what levels of taxes are collected. As I have written previously, our advocacy for tax reform is about reducing excessive inequality and extreme wealth concentration that disrupts our democratic process, NOT about fundraising for the federal government.*

We must reframe fiscal policy debates away from the false narrative of a scarce money supply. This narrative forms the basis for the argument that Social Security and Medicare, among other government programs, are unaffordable. As Alan Greenspan tried to explain to a very disappointed Paul Ryan, “there is nothing to prevent the Federal Government from creating as much money as it wants and paying it to somebody.” There is no unfunded liability crisis.

We cannot give in to the temptation to link tax reforms that address inequities in our economy to the sustainability of important government programs.

  • Firstly, it is economically inaccurate to state that federal taxes fund government spending. The government spends by crediting bank accounts, and taxes can only remove currency that prior government payments added. Taxes cannot be a source of funds.
  • Secondly, we should vigorously defend programs such as Social Security from attacks simply because a government that issues its own currency will never be insolvent. Congress should simply approve a permanent living wage to senior citizens and authorize Treasury to make all payments as they become due, irrespective of taxes received or trust account balances. This is, of course, exactly how we pay for our wars.
  • Finally, linking government programs and investments to a specific tax source leaves those programs subject to unnecessary cuts when tax receipts inevitably fall during recessions. Why would we want to link essential purpose services to business cycles?

It is time we ended the “pay for” mentality. We need to break the bad habit of pairing all of the government’s public investments with a tax, or of linking payments for government programs to the need for a more equitable tax code. They are two separate aspects of government policy, each to be debated on their own merits. This allows us to reframe the conversation on each issue back to how they best serve the public.

For example, the Republican Tax Plan was problematic not because it created a larger government deficit – something that is neither good nor bad in and of itself – but because it gave a massive handout of our public currency to the extremely wealthy, worsening an already excessively inequitable distribution of wealth, and doing nothing to create a more sustainable, shared prosperity.

Now, as Republicans seek to use the enlarged deficit to attack Social Security and Medicare, our response must be to expose their entire false premise – that larger deficits create unsustainable programs. Reducing funding for welfare programs is entirely a political choice, not an economic necessity. Such cuts are cruel public policy that hurts American families and have nothing to do with fiscal responsibility. We will separately argue for a less regressive FICA tax, but not because Social Security needs another source of funds, but rather so that we have a more just and fair tax system.

Our government is not constrained financially like a household. The deficit is not our primary guide for government budget and tax reform discussions. We Patriotic Millionaires have a compelling tax policy message that will reduce inequality and lead to a more prosperous economy for all. We also have a powerful message that our government can already afford to pay incomes to senior citizens, raise wages for its workers, cover the costs of health care, and forgive student loans.

Take care to reframe the debate over fiscal policy the right way. If you need help understanding how our modern monetary system works, you can check out my site Modern Money Basics. Together, we can shift our national conversation in a more positive direction and inspire hope in a better economy for all.

*Note that for state and local governments, which do not issue the public currency, taxes are essential for funding their budgets. The federal government as the issuer of our currency is unique.

The Gun Control Debate: What Debate?

Too often, when you raise the issue of guns in this country, it sparks highly divisive rhetoric with both sides drawing lines in the sand and pointing their arrows at each other. Caught in the middle, we see the faces and hear the voices of children who’ve witnessed the slaughter of their friends and teachers and who are crying out for action. The question is, will we hear them? Will we care enough to do something about it?

Horrific tragedies like the shooting at Marjory Stoneman Douglas High School just over one month ago is something that touches every one of us, regardless of political party or ideology. Sadly, it is something that could happen to any community, family, or school. This is why it’s so important that the humanity and aloha (respect and care) that unites us all must come to the forefront of our dialogue as we try to prevent these tragedies from ever occurring again.

On February 14th, 17 lives were lost in Parkland when a former classmate brought an AR-15 to school and opened fire on the students and teachers. He used a weapon that he had purchased legally – but he shouldn’t have been able to.

There have been more shootings since that day, and there will be more in the coming weeks and years if we don’t come together and find solutions. Survivors and allies across the country have gathered in a show of solidarity, calling for change – to do whatever possible to prevent more of these horrific tragedies from occurring and taking innocent lives. They have organized country-wide protests and walk-outs, and on March 24th thousands will march on Washington and at marches across the country. We are proud to stand with these courageous young people today and every day.

But Congress has yet to act.

The majority of people across this country believe that we need to pass common sense gun safety legislation. A Gallup poll found that two thirds (67%) of Americans feel that the laws covering the sale of firearms should be made more strict; A Quinnipiac University poll found that over six in ten Americans (63%) support stricter gun laws in the United States; And a CNN poll found that seven-in-ten Americans (69%) favor stricter gun control laws.

There are a number of legislative actions that have been proposed but have yet to see the light of day on the House floor. Passing this legislation would be a step in the right direction to protecting our kids and innocent people across this country:

Restrict Access to Assault Weapons

Semi-automatic weapons have been, by far, the most used weapon in mass shootings in recent history. They are used for a number of reasons: they are easy to acquire, and they are designed to kill a lot of people in a short amount of time. The shooter who killed 59 people in Las Vegas on October 1st last year used a semi-automatic gun modified with a bump stock, turning it into an automatic rifle. The 19-year-old shooter who killed 17 people at his former school on February 14th of this year used an AR-15, a semi-automatic weapon.

The fact assault weapons are so frequently used to kill enormous numbers of people in this country, and that bump stocks are not illegal, are issues that we must address. A Quinnipiac University poll found that six in ten Americans (61%) support a nationwide ban on the sale of assault weapons, and an NPR-Ipsos poll found that 82% support banning bump stocks.

Restrict Access to High Capacity Ammunition Magazines

High-capacity ammunition magazines are frequently used by mass shooters in the United States. The Giffords Law Center explains that “shooters with such magazines can fire at large numbers of people without taking the time to reload, those in the line of fire do not have a chance to escape, law enforcement does not have the chance to intervene, and the number of lives shattered by senseless acts of gun violence increases dramatically.”

“Despite the public’s lack of trust in Congress, the American public has not given up hope that change can happen.”

A majority of Americans believe that access to these high-capacity ammunition magazines should be banned. A CNN poll found that over six-in-ten (63%) Americans favor a ban on the sale and possession of equipment known as high-capacity or extended ammunition magazines. A Quinnipiac University poll similarly found that over six in ten (63%) of Americans support a nationwide ban on the sale of high-capacity ammunition magazines.

Increase Legal Age to Buy A Gun

In America, licensed firearm dealers are allowed to sell a gun to an 18-year old, before a bartender is legally allowed to sell that person an alcoholic drink or before they are able to rent a car. To make matters worse, unlicensed persons are legally allowed to sell, deliver, or otherwise transfer a long gun (rifles and shotguns) to a person of any age. This irony is not lost on Americans, causing a vast majority of respondents to believe that the legal age to buy a gun should be increased to 21. A CNN poll found that seven-in-ten (71%) Americans favor preventing people under the age of 21 from buying any type of gun, while a Quinnipiac University poll found that almost 8-in-10 (78%) of Americans support requiring individuals to be 21 years of age or older in order to purchase a gun.

Universal Background Checks

Currently, there is a gaping loophole in federal firearm laws regarding background checks.   While federal laws require licensed gun dealers to perform background checks, federal law does not require unlicensed sellers (like private sellers, and those who sell online and at gun shows) to run background checks. According to the Giffords Law Center, “A 2017 study estimated that 42% of US gun owners acquired their most recent firearm without a background check.” This allows people who might otherwise have been prevented from accessing a gun, to easily acquire one.

In addition, The Washington Post reported in 2017 that “The FBI’s background-check system is missing millions of records of criminal convictions, mental illness diagnoses and other flags that would keep guns out of potentially dangerous hands.” In addition to requiring universal background checks, we must make sure that the database is complete and those who should be flagged, are. For example, I’ve introduced bipartisan legislation to close a loophole that has allowed those who’ve been convicted of domestic violence charges to purchase firearms.

A Monmouth University poll found that over eight-in-ten (83%) Americans support requiring comprehensive background checks for all gun purchasers. A Quinnipiac University poll found that almost all Americans (97%) support requiring background checks for all gun buyers.

While a majority of Americans want the government to implement many of these common-sense gun safety measures, they don’t have much hope that Congress will take action.  Three quarters of Americans (75%) think that Congress needs to do more to reduce gun violence, while only 17% think Congress is doing enough. This disapproval is not relegated to one party. A majority of Americans disapprove of how both Republicans (70%) and Democrats (70%) are handling the issue of gun violence. Mass shootings including those at Sandy Hook, the Pulse nightclub, and the Las Vegas concert, each a devastating demonstration of inhumanity of gun violence, resulted in no significant legislation.

“This is not and should not be a partisan or divisive issue.”

The American people’s lack of faith in the ability of Congress to pass common-sense gun control measures is, unfortunately, founded in reality. Instead of discussing and passing many of these common-sense and favored ways to mitigate gun violence in America, some politicians are talking about arming teachers and bringing more guns into schools. This defies reason. On March 13th of this year, a teacher accidentally fired a gun in a classroom and injured a student, demonstrating the increased possibility of accidents throughout the country if this were made universal. For this and other reasons, almost six in ten (58%) Americans oppose allowing teachers and school officials to carry guns on school grounds.

Despite the public’s lack of trust in Congress, the American public has not given up hope that change can happen. 77% of Americans think that the students from Parkland, Florida, who are speaking out about the shooting at their high school and the issue of gun violence, will have an impact on gun safety reform in this country.

Here is the bottom line: Congress needs to act now, and pass legislation to help improve our gun safety laws. And law enforcement must enforce those laws. The shooter in Parkland was flagged by numerous people who had concerns about what was clearly a serious mental illness, and even made reports to the FBI.  The FBI failed to act, and no one has been held accountable. Local law enforcement failed to act quickly to take out the shooter when responding to the scene. Passing these laws is imperative, but such action is useless unless these laws are implemented and enforced.

This is not and should not be a partisan or divisive issue. People on all sides of this debate felt pain and sadness as our nation mourned the loss of those 17 lives in Parkland. The only way we can really solve the problems is by recognizing that we are all Americans, and we all want safe communities–a place where we can raise our families, where our children aren’t faced with the fear of a shooting when they go to school every day.  We must stop demonizing each other, and instead respect each other’s humanity, and work together to find common ground. It is up to each and every one of us to choose whether we will act in love and light or darkness and hate. By focusing on the love and care that we have for one another, we can bring about real change.

Student Activism: A Force For Change

This month, a school full of children suffered an enormous tragedy. Again. Seventeen young people were gunned down inside a Florida high school but instead of devolving into the same cycle of meaningless debate, we’re seeing a new moment of student leadership. In a time of crushing grief and anger and fear, these students have chosen to rise up and fill the vacuum of leadership that many of our leaders have created. And they’ve been joined in their activism by their peers all across the country.

For decades, the NRA and the politicians backed by them have stymied any effort to push for stronger gun legislation. After Sandy Hook and Pulse and Las Vegas, efforts failed and the conversation faded away time and again. The callousness with which NRA-backed Republicans have shirked away from their responsibilities to play a role is sickening. Again and again, we go through the same ritual — tragedy, debate, defeat, repeat.

We’ve gone as far as convincing ourselves that there’s nothing we can do — as if we’re doomed to eternally suffer these tragedies. But we know what the issue is and we know the steps that needed to be taken. At the moment, the only thing holding us back is the lack of courage it takes for politicians to do away with the NRA and the checks they write. It’s a horrible reason and one that these student activists have now dedicated themselves to ending.

I, for one, think they’ll succeed.

The poise, grace, and passion that these students have conducted themselves with has been inspiring. Their movement is a heart-wrenching call to action from our youngest generation, a rebirth of student activism which may feel new to us now, but I know the power that student activism can have.

As students across the country engaged in Brown v. Board litigation, at 12, my mother joined that fight and sued Western High School in Baltimore so she could desegregate the school when she was 15. She would become part of the first class of black girls to attend that high school from freshman year through graduation. Along with young men and women across the country, they fought for their rights and the rights of young people that would follow them.

My mother raised me on protests. At Columbia, participating in a protest against the university’s plan to tear down the site of Malcolm X’s assassination would get me suspended. It was the first student suspension for activism in nearly three decades, when the famed protests against the Vietnam War rippled through college campuses nationwide.

During my suspension, I went to work for the NAACP in Mississippi, where I trained as an organizer. During my time there, I met other incredible student activists, like Stacey Abrams and Derrick Johnson. This training would come in handy during the uprisings in Baltimore following the death of Freddie Gray. I found myself in a church teaching young people how to engage in nonviolent civil disobedience that would maintain the purity of their message, protect them, protect innocent bystanders, and protect members of the police seeking to keep the peace.

Student activists have the ability to be the loudest and most powerful voices. They’re not hemmed in by the equivocating and hedging that hampers most political discourse. These students know what will keep them safe and they’re not going to stop until they accomplish the change they want to see.

Student activists, and these student activists from Marjory Stoneman Douglas in particular, are the best of us. They’ll do things we’ve told ourselves are impossible.

And I’ll be here, doing everything I can to help them.

Supporting Bill To Fund Veteran Treatment Courts In Hawaii And Nationwide

Rep. Tulsi Gabbard (HI-02), co-chair of the Congressional Post 9/11 Veterans Caucus, announced support today for bipartisan legislation to authorize federal funding for veteran treatment courts in Hawaii and across the United States.

The Veteran Treatment Court Coordination Act (H.R. 4345) would provide federal grants to state, local, and tribal governments to establish new veteran treatment courts and maintain current programs, like the Big Island Veterans Treatment Court. More than 15,000 veterans nationwide have received support through veteran treatment courts.

Congresswoman Tulsi Gabbard said: “In Hawaii and across the country, veteran treatment courts are helping veterans who are dealing with substance addiction and have committed nonviolent crimes get treatment and get their lives back on track. Through high-intensity supervision and a network of support that includes veteran-to-veteran mentorship, job and housing support, employment assistance, treatment and counseling, and more, veteran treatment courts are ensuring that they get the care and services needed to heal, and putting them on a path to success. I’ve met veterans in Hawai‘i who have graduated from this program, and who tearfully share how this program has literally saved their lives. This legislation is an example of some of the long overdue reforms needed in our criminal justice system, and honors our veterans and their sacrifice by providing them with the care and treatment they need.”

Background: The Veteran Treatment Court Coordination Act of 2017 establishes a program within the Department of Justice to provide grants, training, and technical assistance to help state, local, and tribal governments maintain existing veterans treatment courts. The bipartisan legislation also provides federal resources for the establishment of new treatment courts.

H.R. 4345, the Veteran Treatment Court Coordination Act of 2017 is endorsed by numerous servicemembers and veterans organizations including American Legion, AMVETS, Disabled American Veterans, National Military & Veterans Alliance, American Logistics Association, American Military Retirees Association, American Military Society, American and Navy Union of the USA, American Retiree Association, Association of the US Navy, Military Order of Foreign Wars Military Order of the Purple Heart, Military Order of World Wars, Tragedy Assistance Program for Survivors, The Flag, and General Officers Network, The Independence Fund, The Retired Enlisted Association, Society of Military Widows, Vietnam Veterans of America.

The Angry Birds Approach To Understanding Deficits In The Modern Economy

Dr. Kelton clears up the misinformation on Fed Deficits being told Americans. Stephanie consults with policymakers, investment banks and portfolio managers across the globe. Her research expertise is in: Federal Reserve operations, fiscal policy, social security, health care, international finance and employment policy. 

 

What Happens When The Government Tightens Its Belt? (Part II)

In a recent post (What Happens When the Government Tightens Its Belt?), I used a simple teeter-totter diagram to show how the government’s financial balance is related to the private sector’s financial balance in a closed economy. With only two sectors – government and non-government – I showed that a government deficit necessarily implies a surplus in the private sector.

 

 

As expected, this accounting truism ruffled the feathers of a flock of readers who have been programmed to launch into an anti-government tirade at the mere mention of the public sector and to regard the dangers of deficit spending as an unimpeachable fact. And while you’re certainly entitled to your own political views, you are not, as Senator Moynihan famously said, entitled to your own facts.

Other, less impenetrable minds, agreed that the private sector’s financial position must improve as the government’s deficit increases in a closed economy, but they argued that I had not demonstrated anything meaningful because I ignored the financial flows that occur in an open economy.

I still hope to convince both groups that they are acting against their own economic interests when they support policies to balance the budget or reduce the deficit, either by raising taxes or cutting government expenditures. So let’s continue the exercise and, as promised, extend the argument to the more realistic open-economy in which we actually live.

In an open economy, income flows into and out of the domestic economy as residents and foreigners buy goods and services (exports minus imports), make and receive payments such as interest and dividends (factor income) and make net transfer payments (such as foreign aid). Each country keeps track of these payments using a balance of payments (BOP) account, which summarizes the international monetary transactions that take place between the home country and the rest of the world. The BOP has two primary components – the current account and the capital account – and we can use either one to show whether, on balance, money is flowing into or out of a country.

When we incorporate these international flows, we transform the closed-economy accounting identity I used in my previous post:

[1] Domestic Private Surplus = Government Deficit

into the open-economy accounting identity shown below:

[2] Domestic Private  = Government + Current Account

Surplus      Deficit      Balance

or, equivalently,

[3] Domestic Private = Government + Capital Account

Surplus      Surplus      Balance

When the current account balance is positive, it means that we in the private sector (households and domestic firms) are accumulating net financial claims on foreigners. When it is negative, they are accumulating net financial claims on us. Thus, a positive current account implies a negative capital account and vice versa.

To see this in the context of the teeter-totter model, let’s initially hold the public sector’s balance constant at zero (i.e. let’s assume the government is balancing its budget so that G = T). With the government budget in balance, Uncle Sam is a “weightless” entity on the teeter-totter, so that the private sector’s financial position will simply reflect the “weight” of the capital account. Suppose, first, that the current account is in surplus (i.e. the capital account shows an equivalent deficit):

 

 

The image above depicts the benefit (to the private sector) of a current account surplus (a.k.a a capital account deficit), and it is the outcome that many of you accused me of sidestepping in my previous post. Of course, the U.S. does not have a current account surplus, so let’s address that point before moving on. (And lest anyone begin to hyperventilate, I’ll also address the fact that G ≠ T). First, the current account.

Sticking with (G = T) for the moment, we can show how a current account deficit impacts the private sector’s financial position. As the capital account moves from deficit (diagram above) into surplus (diagram below), we see that the private sector’s financial position moves from surplus into deficit.

 

 

But does this all of this hold true in the real world, or is it some kind of economic chicanery? Let’s check the facts.

Equations [2] and [3] above are not based on economic theory. They are accounting identities that always “add up” in the real world. So let’s firm up the discussion about the implications of government “belt tightening” by running through some examples using the real world data found in the table below (Hat tip to Scott Fullwilir for sharing the file. All of the data comes from the National Income and Product Accounts (NIPA) and the Flow of Funds.)

Let’s begin with the data from 1998 (Q3), when the public sector deficit was just 0.01% of GDP and the current account deficit was 2.56% of GDP. Plugging these numbers into equation [2] above, the identity tells us (and the data in the table confirm) that the private sector’s balance must have been:

[2] Domestic Private Sector’s Balance = 0.01% + (-2.56% )= -2.55%

 

 

Here, we can see that the private sector’s financial position was deteriorating because it was making large (net) payments to foreigners. Because this loss of financial resources was not offset by the public sector, the private sector’s financial position deteriorated.

To see how a bigger government deficit would have improved the private sector’s financial position, let’s look at the data from 1988 (Q1). As a percent of GDP, the current account balance was 2.59%, nearly the same as before, while the government’s deficit came in at a much higher 4.2% of GDP. We can use Equation [2] to see effect of the larger budget deficit:

[2] Domestic Private Sector’s Balance = 4.2% + (-2.59%) = 1.61%

In this period, the private sector ends up with a surplus because the government’s deficit was large enough to more than offset the negative effect of the current account deficit.

 

 

Again, this is simply a property of the sectoral balance sheet identities. Whenever the government’s deficit is too small to offset a deficit in the current account, the private sector will experience a net loss. The result my ruffle your feathers, but it is an unimpeachable fact.

So let’s go back to President Obama’s comment and the reason I wrote this blog in the first place. The President said:

“Small businesses and families are tightening their belts. Their government should, too.”

Wrong! When we tighten our belts, it means that we are trying to build up our savings. We do this by spending less. But spending drives our economy. Sales create jobs. So unless Obama has a secret plan to reverse three decades of current account deficits, the Government needs to loosen its belt when we tighten ours. If it doesn’t, then millions of us will lose our shirts.

*An aside: I am aware that I have said nothing about the usefulness of the spending projects, the waste and inefficiency that exists with many government programs, cronyism, inequality, etc., etc. These are legitimate and important questions, but they are not the focus of this analysis. I wrote this series of blogs to try to get people to understand the interplay between the private, public and foreign sectors’ balance sheets.

What Happens When The Government Tightens Its Belt?

Imagine two people sitting on opposite ends of a 15-foot teeter-totter. The laws of physics dictate that the seesaw will balance if the product of the first mass (w1) and its distance (d1) from the fulcrum (i.e. the balancing point) is equal to the product of the other mass (w2) and its distance (d2) from the fulcrum.

Thus, the physicist can show that the teeter-totter will be in balance when the fulcrum is placed 6 feet from the end holding a 150lb person and 9 feet from the end holding a 100lb person. Moreover, the laws of physics ensure that an imbalance will arise if the mass or the relative position of one of the people is changed.

 

 

The laws of accounting allow us to demonstrate that similarly powerful concepts apply to the science of economics. Beginning with the simple identity for GDP in a closed economy, we have:

[1] Y = C + I + G, where:

Y = GDP = National Income
C = Aggregate Consumption Expenditure
I = Aggregate Investment Expenditure
G = Aggregate Government Expenditure

For economists, this is as obvious as stating that a linear foot is the sum of 12 sequential inches. It simply recognizes that the total amount of money spent buying newly produced goods and services will yield an equivalent income to the sellers of these products. Thus, it demonstrates that expenditures are a source of income.

Once earned, income can be allocated in one of three ways. At the end of the day, all income (Y) will be spent (C), saved (S) or used in payment of taxes (T):

[2] Y = C + S + T

Since they are equivalent expressions for Y, we can set equation [1] equal to equation [2], giving us:

C + I + G = C + S + T

Or, after canceling (C) from both sides and moving terms around:

[3] (S – I) = (G – T)

Equation [3] shows that there is a direct relationship between what’s happening in the private sector (S – I) and what’s happening in the public sector (G – T). But it is not the one that Pete Peterson, Erskin Bowles, or President Obama would have you believe. And I want you to understand why they are wrong.

To understand the argument, imagine that you and Uncle Sam are sitting on opposite ends of a teeter-totter. You represent the private sector, and your financial status is given by (S – I). Your budget can be in balance (S = I), in deficit (S < I) or in surplus (S > I). When your financial status is positive (S > I), you are net saving. When your financial status is negative (S < I), you are net borrowing. Uncle Sam’s financial status is equal to (G – T), and, like yours, his budget may be balanced (G = T), in deficit (G > T) or in surplus (G < T). When you interact, only three outcomes are possible.

First, it is conceivable that (S = I) and (G = T) so that (S – I) = 0 and (G – T) = 0. When this condition holds, the teeter-totter will level off with each of you experiencing a balanced budget.

 

 

In the above scenario, the government is balancing its receipts (T) and expenditures (G), and you are balancing your savings and investment spending. There is no net gain/loss.

But suppose the government begins to spend more than it collects in taxes (i.e. G > T). How will Uncle Sam’s deficit affect your position on the teeter-totter? The answer is as straightforward as increasing the mass of the person on the right-hand side of the seesaw. As Uncle Sam’s financial position turns negative, your financial position turns positive.

 

 

This should make intuitive as well as mathematical sense, because when Uncle Sam runs a deficit, you receive more financial assets than you lose through taxation. Put simply, Uncle Sam’s deficit lifts you into a surplus position. Moreover, bigger deficits mean bigger surpluses for you.

Finally, let’s see what happens when Uncle Sam tightens his belt. Suppose, for example, that we were able to duplicate the much-coveted surpluses of 1999-2001. What would (and did!) happen to the private sector’s financial position?

 

 

Because the economy’s financial flows are a closed system – every payment must come from somewhere and end up somewhere – one sector’s surplus is always the other sector’s deficit. As the government “tightens” its belt, it “lightens” its load on the teeter-totter, shifting the relative burden onto you.

This is not rocket science, but it appears to befuddle scores of educated people, including President Obama, who said, “small businesses and families are tightening their belts. Their government should, too.” This kind of rhetoric may temporarily boost his approval ratings, but the policy itself will undermine the efforts of the very families and small businesses that are trying to improve their financial positions.