Thread by @Steinernomics

I'm not going to say this statement is a fact, but I will say it with 80% confidence:

New Federal spending programs should be entirely deficit-financed up until a point.

What is that point? Let's do a back of the envelope calculation...(1/22)

For 2019, the Federal budget deficit is projected to be $1 Trillion or 4.7% of GDP.

The largest the US budget deficit in history was in 1944 at 22.2%. Now that budget deficit resulted in high inflation (but nowhere near hyperinflation) (2/22)

and necessitated higher taxes & govt price-fixing. But briefly setting that aside, lets see what the budget deficit would be at 22.2% of GDP in ‘19.

22.2% / 4.7% = 4.7

4.7x's deficit/GDP...for 2019 that would be $4.7T, or $3.7T MORE than we are currently spending. (3/22)

But what about that inflation? And price-fixing? And rationing? And capital controls?

Well, one of the biggest differences between 1944 and 2019 is trade balance. In 1944, we had a trade SURPLUS of 4.7% GDP and in 2018 it was an $810 Billion deficit or -3.6% GDP. (4/22)

"So what?" you say! Well, a trade surplus represents dollars flowing INTO the US Economy and a trade deficit represents dollars flowing OUT of the US economy. Now certainly there's an advantage to being able to purchase goods and services cheaper abroad; (5/22)

but as we've learned, it hasn't been a net advantage to the middle class in terms of jobs, wages, wealth and income inequality. All of those conditions have worsened on the net the last 4 decades while, yes, TV's and computers have gotten cheaper. (6/22)

Back to the trade deficit: that's $810 Billion dollars leaving the economy in 2018 with a higher amount expected in 2019. So we are essentially neutral in the number of dollars leaving (trade deficit) and being newly created (budget deficit). (7/22)

1944 we were both bringing in dollars (trade surplus) AND creating new dollars (budget deficit) to the tune of 27% of GDP where today we are essentially creating 0% GDP net new dollars every year.

That's fairly evident in both inflation and interest rates. (8/22)

If we were to create 27% GDP net new dollars in ‘19 or ‘20 via Federal spending (which we can control via Congress moreseo than global trade balances), that would be roughly $6T of new spending per year to match 1944's net dollar creation (9/22)

before extraordinary circumstances led to price controls and rationing.

Beyond simply the dollars, we should acknowledge a few other significant differences between 1944 and today: of COURSE there was a massive world war! (10/22)

Beyond Pearl Harbor, it led to zero damage on American soil so unlike Europe and Southeast Asia, our infrastructure remained in tact and this allowed us to become the global market supplier of goods and services. (11/22)

It took Europe and Asia decades to regain its footing...but now we are part of a much more globally competitive economy. Chances of us seeing 1944-era trade surpluses is extremely remote absent a huge boom of some widgets only we can create & export globally (Green tech?) (12/22)

So the persistent trade deficits mean the underlying push back against middle class wealth metrics will always be present.

Additionally, the national personal savings/debt profile is much different now than in 1944. (13/22)

Savings are much lower across the middle class and personal debt is much higher. It's entirely likely that before large amounts of additional Federal spending became near problematically inflationary, the average American would do a lot of paying off...(14/22)

credit card bills, school loans, healthcare obligations and even mortgages before they started consuming in a manner that would drastically push up prices. This is actually deflationary activity. They may even squirrel away more savings before upping their consumption. (15/22)

Finally, we have a lot more old people living a lot longer. They are going to require more spending on healthcare, housing and essentials in their twilight years than they did when they were dying earlier and had larger personal savings in the mid-1900s. (16/22)

Playing off our comparison of $6 Trillion of new 2019 dollars being injected into the economy as a proxy for 1944, is it possible that those deflationary aspects of the modern economy are sufficient to offset the inflationary aspects of 1944...(17/22)

as to safely undershoot the need for price controls and rationing? Perhaps or perhaps not but I'm going to say that $6T/yr is at least the outer bound of what we can add to the economy annually before having to resort to any extraordinary inflation-fighting measures. (18/22)

So increasing Federal spending and the annual budget deficit by $2 or $3 Trillion per year shouldn't be all that problematic or couldn't be managed with normal fiscal or monetary policy tools. (19/22)

Note: This analysis assumes that new spending is on programs that broadly benefit Americans like universal healthcare, infrastructure/green upgrades, college debt relief and a Federal Job Guarantee and/or basic income. (20/22)

If it all goes to further directly enriching the wealthy and defense contractors, I'm not sure the analysis applies except to project hyperinflation in guillotine sales. (21/22)

FWIW its all here in a blog post too...but it seems ppl like to read twitter threads more than blog posts these days (22/22)

steinernomics.blogspot.com/2019/02/can-un…