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July 13, 2002

MaxSpeak Wants Higher Deficits

Now Max is on an issue where we really disagree (and have for years). Max Sawicky reacted to the reports of $150 billion plus deficits to argue the US needs even higher deficits to fight unemployment. Unlike rightwing tax cutters, Max outlines the Keynesian economic argument that government spending fuels economic recovery better than supply-side tax breaks.

It's not that I am allergic to deficits in a recession. However, having lived through the Reagan deficits which failed to significantly cut unemployment for years but were used to undermine social spending as debt climbed, the politics of the issue favors fiscal sanity by progressives.

I've read the macro theory on demand-led multiplier effects but the empirical history just doesn't look that good. Maybe Max has some evidence that, given changes in the global economy, that the multiplier effect still works well. I'm just skeptical.

Posted by Nathan at July 13, 2002 11:52 AM

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The principal argument for Max's point of view is that the Federal Reserve has already shot its bolt--has reduced the Fed Funds rate to 1.75% per year--and can't do much more to stimulate the economy. If the deficit were to be zero instead of $150 billion next year, then to maintain the same total effect on demand would require a Fed Funds rate of -0.25% per year. That can't be done.

Even people who (like me) think that most of the time matching aggregate demand to aggregate supply should be the business of the Federal Reserve are finding ourselves thinking that now is the time for an old-fashioned stimulative Keynesian deficit.

Brad DeLong

Posted by: Brad DeLong at July 13, 2002 02:56 PM

But the skepticism is whether it will work. And if it doesn't, we end up with even less money down the road for social programs, especially if interest rates and debt service costs rise.

I am in no way an alarmist on Social Security, but spending money now that has to be paid back when the boomer retire has to have a pretty guaranteed payoff for me and a lot of others to buy it.

Now, if there are things worth spending the money on - education, jobs and so on-- I'll sign onto temporary deficits for them. But too much liberal economic arguments push the abstract Keynesian points and not enough selling the direct benefits from the spending itself.

Posted by: Nathan at July 15, 2002 02:28 PM

You've said it yourself, Nathan. You're skeptical of the empirical record, and well you should be. But surely, talking about deficits in the abstract is pointless. There are actions that the government can take to push the economy, and these actions increase the deficit. I'm not entirely sure what these actions are (Sen. Kerry advocated investing in infrastructure tonight on Hardball, which is pretty vague). But Bush has given us deficits by giving us a tax cut for the wealthy, and following it up with an "economic stimulus/security" that did nothing to stimulate (or secure) the economy.

There are good deficits and bad deficits. That is to say, there are deficits which offset their own intrinsic cost by stimulating the economy and boosting tax revenues (lower unemployment, increase payroll tax receipts). What this country needs is a good, animated national debate about how deficits can be made to work, and where they've gone wrong so often in the recent past.

Whether or not it's a tasteless political fib, we really have "hit the trifecta". We've got deficits, we've got very low interest rates, and we have a sluggish recovery with negligible job creation. Ok, so we've got to get this economy pumping again, and if it takes some more deficits to do it, fine.

Note: I majored in economics in college, but it was in one ear and out the other. If I've made any serious errors here, for my own benefit, I'd appreciate being made aware of it by those who understand these things better than me.

Posted by: Terminus at July 15, 2002 10:42 PM

Bob Reich once made the distinction between deficits for investment and deficits for spending. Going into deficits to pay for education makes sense, as any college family knows, because its an investment into the future. Going into debt for a new big screen TV makes less sense. The Keynesian argument isn't just for deficits, but for investment deficits. Thats why the Regan example doesn't show us much.

Posted by: Judah Ariel at July 16, 2002 01:14 AM

No, the Keynesian argument is for deficits, period. Yes, spending the money on useful things is a good idea but the point is to spend money on ANYTHING. To quote the famous line in the GENERAL THEORY:

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again . . . there need be no more unemployment. . . . It would indeed be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."
John Maynard Keynes, The General Theory, p. 129.

I believe that spending money on education and job training and other investments are a good thing, regardless of whether it is deficit spending or not. If you are in a recession, you may end up having more spending needs than revenue, so deficits may happen. But the point is to advocate for the useful spending, not the abstract deficits-- unless you buy the Keynesian idea.

Why the empirics on Keynesianism seem sketchy in recent decades is an open question. Some attribute it to the global economy where spending may be pissed away on imports. Some argued that Reagan's massive deficits were useful for fueling growth in other parts of the world through the rising trade deficits by American consumers-- which might explain its weakness in helping unemployment in the US.

So one reason investment spending makes sense is that it is more likely to drive employment in the US. Education is a perfect example - it automatically needs local teachers, local building construction and other local services.

But I still question the politics of the whole thing just on empirical history of what worked.

Posted by: Nathan Newman at July 16, 2002 01:37 AM

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