The following is re-posted from Warren Mosler’s site.
The main reason we have a large budget deficit is because of all the tax advantaged savings plans- pension funds, IRA’s, insurance and corporate reserve. All of these financial assets, which compound continuously, represent unspent income. And unless they are offset by some other agent spending that much more than his income, the dollars won’t be there to be saved in these tax advantaged entities.
And also realize this is an accounting identity, beyond dispute. Like 1+1=2. Like how your check book must balance or you made an arithmetic mistake.
It works like this:
People work to produce and sell goods and services and someone get the dollars from all those sales. Those dollars that came from the sales are exactly the amount needed to buy those things in the first place. If anyone doesn’t spend the dollars he gets from the sales, there isn’t enough spending for the sales to happen in the first place.
So when a large chunk of our dollars that we get paid from wages and profits go into pension funds, and don’t get spent, all the things for sale can’t get sold unless someone spends that much more than his income.
And if we (both residents and non residents) don’t want to- or can’t- spend more dollars than our dollar incomes by borrowing dollars to spend, sales fall short,so income and jobs are lost in a downward spiral, that doesn’t end until someone finally fills that spending gap by spending more than his income to replace the spending power lost when earned dollars go into pension funds.
That’s where the government comes in. When those dollars piling up in pension funds cause spending to fall short, government can spend more than its income to make up for that lost spending power, fill the spending gap, and keep everyone working and producing and selling real goods and services.
So right now the high unemployment and low sales tell us there is still a big spending gap to fill. In the past, this spending gap might have been filled by people borrowing to spend on houses and cars and all that. But this time around people aren’t willing or able to fill the spending gap.
The current level of government spending that exceeds taxes (deficit spending) is only partially filling the current spending gap. It’s a big economy and pension funds and corporate reserves are huge and growing, which means the spending gap is huge and growing which means the amount government spends that’s more than it taxes (government deficit spending) is still too small to fill the spending gap.
The answer is quite simple - cut taxes and/or increase government spending until output and employment is restored and the spending gap is filled.
Unfortunately our fearless leaders have a large gap between their ears, and have it all backwards, and we’re all paying the price. And it will get a lot worse if they keep cutting the government deficit and make the spending gap wider instead of narrower.
What I particularly like about the above article is that there is no mention of government borrowing. Quite right. As I pointed out here, the arguments for government borrowing are a load of B.S. Or to put it even more bluntly (if that’s possible), the actual reason for government borrowing is that it enables politicians to buy votes.