Deficits – the Good, the Bad and the Ugly
There’s news that President Obama plans to reduce the U.S. deficit by half before the end of his first term, and ordinarily that would be good news. But there’s a time for everything, and this is definitely not the time to talk about reducing deficits.
I’ll concede that deficits can do a lot of harm. For one thing, when the government sucks up the available credit, private enterprise is deprived of needed capital. For another, huge deficits lead to runaway inflation. Still, if the deficit is controlled, it can be a useful economic tool. The trick is to keep it within manageable limits. The bigger the economy the bigger the deficit can be without causing too much damage. And the U.S. economy is pretty big – the Gross Domestic Product last year was $14.3 trillion.
The U.S., and the rest of the world, are in an economic slump that could trigger a deflationary spiral. And that would mean a deep Depression. The President’s immediate task, as he has repeatedly acknowledged, is to turn the economy around. And the only way of doing that is to budget for a deficit.
Whether you believe in tax cuts or government spending, the end result is the same – more money going out than coming in. That means a deficit. The trick is to use the deficit to invest in initiatives that will pay dividends later on. It’s like borrowing money to retool a factory, making it more efficient. If all goes well, the profits from the increased efficiency will pay back the money you borrow, and even leave you a little extra.
I am not sure that the $787 billion stimulus plan is big enough or targeted precisely enough to do the job, but I fervently hope it will stop the precipitous economic decline. Even so, I cannot believe the economy will improve sufficiently by the end of the President’s first term for him to think about deficit reduction.
That was the mistake Franklin Roosevelt made. He turned the economy around with the New Deal but (apparently just like Obama) listened to conservatives and tried to balance the budget too soon. That kicked the recovering economy in the guts, and it took World War II to get the wheels of commerce whirring again.
I pray with all my heart that another world war will not be the only answer to the current economic crisis.