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Why Government Spending Is the Solution, Not the Problem

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Hundreds of thousands of people marched to the U.S. Capitol on Sunday, carrying signs with slogans such as "Obamacare makes me sick" as they protested the president's health care plan and our so-called "out-of-control spending." The marchers were chanting "enough, enough" and "We the People." Others, channeling their inner Joe Wilson, screamed "You lie, you lie!" while waving U.S. flags and the now omnipresent images of Obama as Hitler, or Obama as the Joker, along with the usual placards decrying the "march to socialism."

And the reaction against the expansion of the state is by no means restricted to America, nor to people concerned about health care. According to the London Sunday Times, voters are overwhelmingly in favor of public spending cuts rather than tax increases to close the budget "black hole." Sixty percent want to shrink the size of the state to curb the 175 billion pound deficit amid mounting government disarray over the public finances. Naturally, there is also growing support for this line of thinking in the financial community, despite having successfully received tens of trillions of dollars. Even deeply-insolvent institutions are on board.

Beyond Deficit and Solvency Myths

The large banks and brokers lobbied for special treatment and got it; they manipulated government legislation for their own ends. To the extent that government spending is being used to prop up these economic zombies, we sympathize with the prevailing orthodoxy.

However, we believe that the principle opposition to increased government spending is predicated on the simplistic notion that the same government that has driven social security and Medicare to bankruptcy and national ruin is about to do the same with health care. Ultimately, objections to fiscal activism always come back to what we have been saying for a long time: namely, the need to get past the deficit myths and wrongheaded notions of "national solvency" so that we can move forward in other areas. In the words of economist Bill Mitchell of the University of Newcastle, Australia:

Within a modern monetary economy, as a matter of national accounting, the sovereign government deficit (surplus) equals the non-government surplus (deficit)....In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.

A seemingly growing populist drive toward a return to fiscal orthodoxy follows a stream of similar pronouncements from Wall Street, the Fed, the European Central Bank and the OECD, all of whom are legitimizing a campaign against further public spending and mobilizing support for "exit strategies" as they confidently pronounce the end of the recession. Implicit is the view that somewhere along the line, ongoing government involvement in the "free market" reaches a tipping point where fiscal "intrusions" no longer act as a stabilizing force, but instead impede the natural tendency of the market to equilibrate to recovery. The major hypothesis is that any time the government is involved in the economy, eventually things go bad. But markets do not self-regulate in ways that avoid major financial upheavals and activist government is required as a counterbalancing force.

Read the rest of the argument on NewDeal2.0.