The Dangers of Deficit Reduction

Stiglitz on the nuances of deficit reduction:

 Most economists also agree that it is a mistake to look at only one side of a balance sheet(whether for the public or private sector). One has to look not only at what a country or firm owes, but also at its assets. This should help answer those financial sector hawks who are raising alarms about government spending.  After all, even deficit hawks acknowledge that we should be focusing not on today’s deficit, but on the long-term national debt. Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits. Banks’ short-sightedness helped create the crisis; we cannot let government short-sightedness—prodded by the financial sector—prolong it.

Faster growth and returns on public investment yield higher tax revenues, and a five to six percent return is more than enough to offset temporary increases in the national debt. A social cost-benefit analysis (taking to account impacts other than on the budget) makes such expenditures, even when debt-financed, even more attractive.

Finally, most economists agree that, apart from these considerations, the appropriate size of a deficit depends in part on the state of the economy. A weaker economy calls for a larger deficit, and the appropriate size of the deficit in the face of a recession depends on the precise circumstances.

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Stiglitz, Joseph E. (2010) "The Dangers of Deficit Reduction," The Economists' Voice: Vol. 7 : Iss. 1, Article 6.
DOI: 10.2202/1553-3832.1741
Available at: http://www.bepress.com/ev/vol7/iss1/art6

 

Posted via email from Jim Nichols