New Economic Perspectives has the article The New Populism Needs to Get This Straight by Joe Firestone. Until very recently, I would have been shocked by what this article has to say.

…the economic fact that the surpluses of the Clinton’s term, as well as his deficit reduction policies, were bad for the US because they reduced or eliminated private sector surpluses causing a growth in private sector debt in Clinton’s “goldilocks” economy.
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It would greatly help the new populism and the DC progressive establishment, also, if it took the trouble to learn a simple macroeconomic equation, which is an accounting identity, and which will help them gain clarity of thinking when it comes to fiscal policy, trade policy, and their inter-relationship. That equation is:

The Government Sector Balance + The Private Sector Balance + The Foreign Sector Balance = 0; where the balances refer to transaction flows in an accounting period.

The Government Sector Balance is positive when the Government taxes more dollars than it spends. That’s what we’ve been calling “a surplus.” The private sector is positive when it saves more dollars than it spends, and the foreign sector is positive when it saves more dollars than it spends. This last, please note, is equivalent to what I’ve been calling a “trade deficit.”

So now, let’s say people want to save 6% of GDP per year, and they also want to run a trade deficit of 4% of GDP per year. Then a policy of deficit reduction that aims at a deficit of 3% obviously won’t accommodate these private sector desires, since 6% + 4% requires a government deficit of 10% for support.

The point of this article is that you may be surprised at who goes into debt when the government runs a surplus as opposed to who goes into debt when it is just a question of very unequal distribution of wealth.  When you put together insufficient deficit and very unequal distribution of wealth, you get the great recession of 2008-2010 and the still present aftermath.

Until I started reading New Economic Perspectives and reading about MMT in other places as well, I depended on my knowledge of economics from what I learned in the early 1960s. I was and am a firm believer in Keynesian economics. However, I did not understand the debt and deficit the way I do now as explained in this article.

The people who blog in places like New Economic Perspectives need to understand that even their potential allies, who escaped the brainwashing of the Kochs and of Pete Peterson, may still have trouble understanding the impact of deficits and surpluses as now so well understood by people who are current.

So keeping up the efforts to re-educate and specifically communicating with progressives is essential to shifting the country’s thinking.

Extra credit diversion.

It is interesting to reconcile these ideas with the ideas from my previous post Diagrams and Dollars: Modern Money Illustrated (Part 1 & 2). Let us look at the final diagram from that post.

The PS pot is for the “Private Sector”, and the FG pot is for the “Federal Government”. The issue of Private Sector debt is hidden by this diagram because the PS pot is undifferentiated. To really understand the point of the current article, you have to see that the PS pot can be separated into the domestic private sector and foreign part of the “private” sector. The “foreign sector balance” in the equation from the current article [which has nothing to do with the FG pot] is the part of the PS pot that is not domestic. The “private sector balance” in the equation from the current article is the “domestic part” of the PS pot.

The level of the Treasury Bond Saving Accounts pot is labeled “National Savings Clock”. I think this is a misnomer. This total is for the entire savings from the PS pot which includes non-domestic savings in USA money.  Also realize that the contents of the Treasury Bond Saving Accounts pot is held by the FG where it is accounted for as  as a liability just like a savings account sitting in a bank is thought of as a liability of the bank.

Also note that the domestic part of the PS pot can be further divided into the part for the wealthy 1% of the domestic population and the part for the other 99% of the population.  A lot of our troubles are hidden in that separation.

The totals for the PS pot may look great, but the health of the different parts of that pot may look totally different from the pot as a whole.

This discussion is already getting too complicated. I really need to make my own drawing and devote a separate article to this topic.

There is a link above to the book Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems [Paperback] by L. Randall Wray.

PBS has the article Exposing the Textbook Scam: How to Save Us from Economists. At first, I was afraid of what crap this article might contain, then I realized how topsy-turvy the world has become.

As we see it, the problem begins with a failure to diagnose the problems of unemployment and inequality. Many macroeconomics textbooks today accept as plausible, if not gospel, that there can never be a deficiency of aggregate demand — a deficiency of spending, that is — caused by our present economic system. According to this orthodoxy, economic downturns are caused by factors external to the system itself and can usually be attributed to the government mucking with the market: government overspending, for example, which racks up a ruinous debt load or profligacy by the central bank, creating too much money out of thin air. If this were the case, the best policy for recovery would be to cut back government spending, taxation, regulation and money creation.
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Our opposing point of view has a small but growing minority of economists, among them Paul Krugman, whose textbook ranks third in the macroeconomics market and whose basic economics textbook, written with Robin Wells, has also gained some popularity.

This alternative view of macro is popularly called “Keynesian,” but it includes all kinds of leftist views, from institutionalist to radical. It asserts that downturns and crises are not due to technological change or any other external forces, but primarily to the extreme swings of the economic system itself, which government must moderate. It also argues that inequality has a seriously negative impact on the macro-economy — decreasing aggregate demand — as well as obviously harming so many of the individuals that the economy supposedly serves.

How can anyone alive today that is more than 5 years old still believe “that there can never be a deficiency of aggregate demand”?  How can aggregate demand stay at a high level when people suddenly lose their money or become afraid to spend it?  Didn’t you see this happen with your own eyes in the economic collapse as George W. Bush was at the end of his term as President, and extending well into Barack Obama’s term?  How could you believe anyone who tells you that this did not happen?

Before the 2008-2009 collapse, if you knew anything about the Great Depression of the 1930s, how could you possibly believe that such a thing could not happen?

The “alternative” view is the one that I was taught in the early 1960s when I studied economics from Paul Samuelson’s text book.  This view is the one that I never stopped believing in. This is the same economics that Paul Krugman undoubtedly learned at about the same time that I did.

To show you how old I am, I was going to make a remark about how similar this fashion fad in economics textbooks is to how my wide neckties are coming back in fashion.  Then I realized that I also had narrow ties, and I don’t know which set of ties may be coming back into fashion.

I think that what this article proves is that the likes of the Koch brothers, Pete Peterson and his Peterson Institute, and Ron Paul have been very successful since the 1960s.  They probably were taught the same economics as I was in the 1960s, but they did not like what they were taught.  Since the 1960s, they have been using whatever resources they had to erase what we were taught from our collective memories and replace it with the garbage that suits them better.  In the case of the Kochs and Petersen, their resources were enormous amounts of money.  In Paul’s case it was the national political stage.  I don’t know what Milton Friedman’s motivations might have been.  Was he just seeking glory, or was he the tool of these other folks?

This also explains why President Obama cannot get his economic policies right.  He is of the younger generation that was brainwashed with Friedmanomics.  Some of the people he chose for his cabinet tried to explain the real economics to him, but he never could quite believe it.  All the people who understand real economics have since left his administration, and what was left were the ones who were equally brainwashed, or self-interested enough to believe Friedmanomics.  (Well, who knows if they really believe it, but it sure is profitable for them to say they believe Friedmanomics.)