The Fiscal Policy Experience Since the Great Recession

Naked Capitalism has the article The Fiscal Policy Experience Since the Great Recession. The article finishes with a nice summary of how we ought to look at government deficits. (Emphasis added by me.)

The question should always be whether the fiscal position is supportive of a high level of economic activity, and the budget deficit should be large enough to support that level of economic activity—but not larger. When private sector demand is low, then potential savings are high and will become available to support budget deficit of an appropriate size. Debts accumulated from appropriate deficits can similarly be readily accommodated. Instead of fretting about the debt ratios and striving to always balance the (structural) budget, the focus should be on why a deficit is often necessary for a reasonable level of economic activity.

This nicely puts an end to the straw-man argument that austerity fanatics frequently put up. They try to make their point with an argument using reductio ad absurdum (Latin for “reduction to absurdity”). They propose the theory that if a deficit is good for the economy, then a bigger deficit must be better. Then they propose absurd levels of deficit to prove that deficits cannot be good. The above summary from the articule talks only about “budget deficit of an appropriate size”. Deficits can be too large, but they can also be too small. Reductio ad absurdum just leads to absurd results. Dismiss the people who try to prove that deficits are never good.

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