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.
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.