From Warren Mosler’s free book Seven Deadly Innocent Frauds of Economic Policy.
Deadly Innocent Fraud #3:
Federal Government budget deficits take away savings.
Federal Government budget deficits ADD to savings.
So what is the role of deficits in regard to policy? It’s very simple. Whenever spending falls short of sustaining our output and employment, when we don’t have enough spending power to buy what’s for sale in that big department store we call the economy, government can act to make sure that our own output is sold by either cutting taxes or increasing government spending.
Taxes function to regulate our spending power and the economy in general. If the “right” level of taxation needed to support output and employment happens to be a lot less than government spending, that resulting budget deficit is nothing to be afraid of regarding solvency, sustainability, or doing bad by our children.
If people want to work and earn money but don’t want to spend it, fine! Government can either keep cutting taxes until we decide to spend and buy our own output, and/or buy the output (award contracts for infrastructure repairs, national security, medical research, and the like). The choices are political. The right-sized deficit is the one that gets us to where we want to be with regards to output and employment, as well as the size of government we want, no matter how large or how small a deficit that might be.
What matters is the real life – output and employment – size of the deficit, which is an accounting statistic. In the 1940’s, an economist named Abba Lerner called this, “Functional Finance,” and wrote a book by that name (which is still very relevant today).
It was interesting to read how many economics experts of the highest caliber did not understand this until Warren Mosler explained this to them. It is obvious that the academic discipline of economics is different from the academic discipline of accounting. However, if economists don’t know how to do the accounting of the money on which they opine, should they stop offering opinions on that for which they cannot account?