The Budget Deficit Is Too Small

I've written a fair amount lately about being less concerned with growing budget deficits than stimulating the failing economy. Beyond yearning for an austerity regime that allows Americans once again to embrace their penchant for risk-taking, there are in fact less ideological arguments for keeping the budget deficit low, even in times of economic decline. Jamie Galbraith of the University of Texas provides a useful explanation of why we shouldn't fall victim to those arguments:

Right now and for the immediate future, the budget deficit is the only source of demand that can fuel a recovery. Our present problem is not that it is too big, but that it is too small. Far too small.

He helpfully clarifies what the scalpel Obama will yield to cut "wasteful spending" should be used for (Is ax-wielder McCain listening?):

[T]he point of cutting waste and boondoggles is not to reduce the deficit, but to release real resources for better uses. The obligation to use those resources, and to deploy the public funds necessary to ensure that they are used, remains.

This is one of the most important points to keep in mind as Republicans (and some Blue Dog Democrats) argue against "wasteful spending" come January. The House and Senate are going to tackle some legislative challenges critically important to the middle class (SCHIP, perhaps a national infrastructure bank, even - and this involves less spending - a credit cardholders' bill of rights). Fiscal conservatives will argue that such "extra" spending should be trimmed. To the contrary. As Galbraith reminds us, budget cuts should be designed to allocate inefficiently used resources to government programs with the most potential for investment returns. Spending on health care and infrastructure (both done primarily within the United States) are two such programs.

Finally, Galbraith dismantles the common anti-stimulus argument that public investment crowds out future private investment:

a successful program of public expenditure will create profit opportunities that will encourage private businesses, many of which will otherwise close, to stay open and eventually to expand. A general improvement of economic conditions can only lower, not raise, the presently prohibitive risk premiums on interest rates being charged private borrowers! There is no way that present or future public spending, even in very large volumes, would under these conditions raise long term interest rates generally by enough to offset the positive effects of an increase in activity and a reduction of risk. Quite the contrary! Public spending will crowd in, not crowd out, private investment.

Galbraith is saying that public investment is the means to - not a hindrance of - increased private investment.

Comments

[rmajh5]

I find it to be sad that we live in a country called the United States of America with a Constitution which recognizes both individual freedoms and the obligations of all of us to our greater community and yet, thus far, we, or at least, the majority of us, find the growing gap between the rich and the poor to be acceptable, and we see no problem whatsoever with employees of businesses making $20 an hour ($36,400 per year) and administrators and CEOs of said businesses making ten times that number ($364,000 per year) and as often as not, far more than that for work, which, if successful, can only be judged so if the whole team including management and workers, are playing the game well.

I don't have the final answer for how to correct this problem. Somewhere in the middle of pure capitalism and pure socialism, I would think ... a place where the people at the bottom would have enough upon which to live and the people at the top, having enough to live extremely well, would be contributing a sufficient amount in taxes for the good of the entire society, which in the end, means for the good of the rich as well.

[MichelleCuoco]

The government can pour $700 trillion into the economy, but without the capitalists and businessmen at the front line utilizing the stimulus, the bailout is useless. So when all is said and done, how will capitalism take us across the finish line? It is time to start seriously analyzing this. What have we learned? What can this money actually do? Will businessmen across the country change their ideologies or will they revert back to failed tactics?

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