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Friday, November 13, 2009

I'm no macroeconomist (or accountant)

I am scratching my head over this one and I wonder if I am just making too much out of something that is painfully obvious to the macroeconomists (and macro-accountants). I heard this yesterday and then read this sentence today:
The Wall Street Journal reported Thursday the White House is considering applying some money from the $700 billion financial bailout bill to deficit reduction, and that Cabinet agencies have been asked to submit two budget plans for next year, one that freezes spending at existing levels and one that trims spending by 5 percent.
The stimulus package is 100% deficit financing (unless one wants to claim that the entire budget, at any point in time, is entirely fungible in which case we could claim that the entire "defense" budget is deficit spending and NOT the stimulus plan, but I digress...)

If the stimulus package was 100% deficit spending then how is it possible to use deficit spending to cut down on the deficit? I can see NOT spending stimulus money as a way to "reduce" the deficit but that seems to be a slimy political move and not something that is actually real.

If one is using credit cards to finance day-to-day living then one is engaged in deficit spending and in adding to one's debt. If one credit card is used to pay off another credit card, that doesn't seem to reduce the deficit spending and it doesn't seem to reduce your debt. If the government said earlier this year that they were going to spend $100 on building a bridge, which was added to the reported deficit numbers, and later in the year decides to spend the $100 on a work training program, does the deficit decrease? If, on the other hand, the government decides not to spend the $100 at all, I suppose the deficit would "drop" but not in a real way.

I am sure I am missing something here.

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I believe they are talking about TARP. The bailed-out firms repay the money (with interest) and they could turn around and give that money back out to more banks, they could reduce the deficit with it, or some of both. Yes, the original money given out added to the deficit in one year, but seems like you could reduce the deficit in another year by counting the money coming back in as revenue.
Okay. I see what might be going on here. The tarp money was deficit spending. Paying back the tarp would offset debt from previous deficits or offset current deficit because it is fungible. However this does nothing to the overall debt level increase caused by the original tarp. Profits from tarp can be used to offset current deficit or debt for a modest net gain.

Still smacks of politics more than sound economic policy
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