THE BLOG
01/23/2009 05:12 am ET Updated May 25, 2011

Remembering the Lessons of Economics 101: Why Increasing the Federal Deficit Does Not Mean that Our Kids Must Sacrifice to Pay the Bill

Everyone who took Economics 101 (at least when I took it 40 years ago) remembers their professor asking what at first might have appeared to be a trick question: "When the economy goes into recession, the natural tendency of consumers is to spend less and save their money. Is that a good thing for the economy?"

Sounds logical enough. When your income drops or you face the threat of losing our job, you tighten your belt. How could that not be the right thing to do?

Of course the answer is that such belt tightening is a disaster for the economy. It contributes to the downward spiral of economic activity: less consumer demand, less money invested to create products to sell to consumers, less people hired to make or sell those products, less consumer demand and so on.

Now you can't require that individual consumers spend more when they have less money -- so the answer to ending the recession or restoring growth is for the Federal Government (all of us acting together) to invest more money in the economy and put people back to work. And that's true even if you have to massively increase the Federal deficit.

That critical understanding was one of the chief lessons America learned from the New Deal. But, at least until its massive and irrefutable failure this year, the conservative conventional wisdom that dominated political and economic debate since the mid-1970s has convinced many Americans that deficits are always evil.

The conservatives' success in vilifying deficits as a tool of fiscal policy is all the more remarkable because the Republican administrations of Reagan and Bush II created many times more deficits than all of the other American presidents in our history combined. But it has served their interests, none the less, to pray upon normal people's natural aversion to debt as a weapon in their war to reduce the size and spending of the public sector.

Perhaps their most successful argument has been their claim that when we run Federal Budget deficits that our children will be forced to "sacrifice" in order to pay off the massive debts that have resulted from our "out of control" Government spending.

It may sound obvious that when the Federal Government spends more than it takes in -- and borrows money to make up the difference -- that our kids must ultimately sacrifice to pay the bill. But when you look more closely, this notion is also wrong.

Someone must, of course, always pay the bill for the debt we have incurred. The fallacy comes from the view that future generations must "sacrifice" to do so. In fact, they are often much better off than they would be if the Government "lived within its means' and didn't create the deficit in the first place.

To understand why, you have to think about what we really mean by "wealth" or "well being". Wealth is created when people produce products or services out of the raw materials we find in our environment using the tools we have created for that purpose. Wealth is created by human labor -- by economic work.

The measure of whether or not future generations will be wealthier or must "sacrifice" because of our actions today is whether those actions generate more labor and allow that labor to be more productive in the future. In other words, the amount of wealth we produce is a function of the number of hours we work as a society and the degree to which we increase the productivity of labor so we can produce more wealth per hour.

The more fully we employ our work force -- the more we invest in education, and technological innovation -- the more wealth we create.

When the Federal Government borrows money to put more people to work -- to build bridges, or mass transit lines, or repair schools, or provide health care or to allow people to buy food -- it directly increases our store of wealth and that of our children. That is particularly true if people are working to create products that will be used over many years or increase our productivity -- like a new power grid, new schools, or public transportation. What's more if that deficit is used to jump start the economy to begin the upward economic spiral of more consumer demand, more investment, more employment, higher incomes, more demand and so on, it can exponentially increase the wealth of future generations.

In times of economic recession or slow growth, deficits do not force future generations to sacrifice to pay off our debt. In fact the use of deficits bequeaths our kids wealthier more prosperous lives -- even after they pay off the debt created by the deficit.

Our kids would be in far worse shape if we failed to generate the deficit and allowed the downward spiral of economic activity to continue.

By fits and starts Franklin Roosevelt learned these lessons during the Great Depression. His willingness to generate deficits early in his first administration gradually put the brakes on the economy's downward slide, until advisors convinced him that he must cut the deficit. That caused the economy to slide back in to deep recession until it was rescued by the massive deficits generated by World War II. After Pearl Harbor no one questioned the absolute necessity of fully employing everyone in America -- and all of our plant and equipment -- to produce what was necessary to win the War -- even if we had to generate deficits to do it.

Clearly in some circumstances excessive Federal debt can crowd out other debt, drive up interest rates and choke off economic growth. A recession is not one of those circumstances.

Next month President Elect Obama has proposed that Congress consider a large jobs and economic recovery program that is intended to create or preserve 3 million jobs -- and jump start our economy.

Some Republicans will argue by analogy that when times are tough you don't increase your spending, you tighten your belt and live within your means. That may be a good idea for an individual. It's a terrible idea for a country.

When times are tough for a community or country, we need to do whatever is necessary to put everyone to work producing more wealth. That's what will determine the economic well being of future generations, not the size of our deficit.

Robert Creamer is a long time political organizer and strategist, and author of the recent book "Stand Up Straight: How Progressives Can Win," available on Amazon.com.