In defense of deficits

James K. Galbraith
San Francisco Chronicle

Sunday, March 21, 2010

The Simpson-Bowles Commission, just established by the president, will no doubt deliver an attack on Social Security and Medicare dressed up in the sanctimonious rhetoric of deficit reduction. What would be the economic consequences if the commission did? The answer is that a big deficit-reduction program would destroy the economy, or what remains of it, two years into the Great Crisis.

For this reason, the deficit phobia of Wall Street, the press, some economists and practically all politicians is one of the deepest dangers that we face. To cut current deficits without first rebuilding the economic engine of the private credit system is a sure path to stagnation, to a double-dip recession - even to a second Great Depression.

There are two ways to get the increase in total spending that we call "economic growth." One way is for government to spend. The other is for banks to lend.

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. Ordinary people benefit, but there is nothing in it for banks.

(More here.)