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The hysteria over the deficit by the Republicans which spread to the Democrats now seems to have become part of our collective general wisdom. And it’s unnecessary and it’s also wrong. First, much of the deficit is due to our economic downturn and the resulting Automatic Stabilizers kicking in. We have a progressive tax system, as wages lower the tax burden drops correspondingly. As an economy grows and wages rise, tax receipts rise too. Similarly, when the economy falters transfer payments (unemployment insurance/food stamps/people collecting Social Security) increase. When the economy improves transfer payments drop, along with an increase in tax receipts this lowers the deficit. The deficit is NOT due to Obama spending.
The link to a chart below shows an increase during TARP then govt spending (consumption expenditure) normalizing.
Comparing the govt to a household or business is not a valid comparison, unlike the private sector a sovereign govt with a floating currency can create money at will, and can deficit spend. Where the comparison becomes valid, in a sense, is when one considers the economy as a whole. If the private sector spends more than it saves, like in a bubble, the government can run a surplus and save more than it spends. When the private sector is hurting like it is now and is paying down debt and saving, the govt MUST deficit spend in order to spur demand. We’re a consumption-based economy.
The gap between optimal production of goods/services and real consumption of goods/services is called the output gap. So with the private sector not spending, should the govt curtail spending (balance the budget to cut the deficit) the output gap will widen further. Less demand, falling consumer confidence, double dip recession.
The President absolutely MUST increase spending and he MUST get it across to the American people why he is doing it.
Congress is currently working to deliver a financial reform package. I have my doubts on how good it will be but there are some encouraging signs. But whether or not the package we end up with is a good one, unless the federal govt picks up spending we will go into another recession. And the Republicans will seize the opportunity to blame the double-dip on the Democrats financial reform package. The only way to confront this head on is for the President to pursue the necessary fiscal policy and to keep pounding the message to the American people so Republican misdirection can be thwarted.