The cause of the recession is not the government surplus it was the bubble that caused both the surplus and the recession that is why they correlate. There have been many recessions when the government was not in surplus.
Public sector surplus, or even getting within shouting distance of surplus, drives private sector debt and that causes asset bubbles. And yes, they do pop.
Sectoral balances tells us that we can’t have surplus in all three main sectors. Considering we have been a net importer for some time, and for the foreseeable future, public sector surplus has to place the private sector in deficit and will force it to leverage bank debt. This is why austerity politics to “pay” the debt are very very good for bankers. Judging from our history the magic number seems to be deficit of 3% of GDP. Below that for any length of time the economy is at the mercy of the banks for its funding. Another factor that contributes to this is income distribution because accumulated wealth is sequestered from circulation with no velocity.
By Scott Fullwiler Given the recent posts by Daniel Negreiros Conceição and Eric Tymoigne to this blog, and…neweconomicperspectives.org