Why Deficits Don’t Matter

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Congress is coming off of a bruising debate over the deficit ceiling – a preview of what we will experience again in a few months.  The economy is growing slowly – some would say incrementally, after the 16-day government shutdown.  Unemployment is a lingering problem, and the Fed’s quantitative easing (QE) program works in reverse; that is, instead of boosting economic growth in any visible way, any hint of ending it spooks the markets.

What’s to be done about this mess?

Stephanie Kelton, Associate Professor of Economics at the University of Missouri/Kansas City, believes that the root of all these problems can be found in a fundamental misunderstanding – shared by Democrats, Republicans and mainstream voters alike – about the government’s balance sheet.  She argues, plausibly, that the whole idea that we should control the deficit at all is costing our nation trillions of dollars in lost output. The result is lost income, savings, wealth and prosperity.

“As a society, we don’t understand government finance,” says Kelton.  “Most people – including most economists, think that it operates by the familiar rules of household finance.  Therefore, we find it plausible when we hear politicians and government watchdogs urging us to balance the budget, control the urge to spend and pay down the debt.”

The mantra on the right: the federal government has to stop spending money it doesn’t have.  The mantra on the left: we need higher taxes on “the rich” in order to balance the budget and pay down the federal deficit.  Moderates call for a little bit of each.

“We act like there is some limited amount of money available,” says Kelton, “and that government competes for savings with the rest of the economy, and that too much competition for savings drives up interest rates, and higher interest rates crowd out all productive private investment.  We act like the federal government is walking a fine line between solvency and insolvency – that if the debt gets too big, our creditors may begin to get nervous, downgrade our debt, our interest rates go up, and suddenly we end up like Greece.”

Yes.  So?  “That picture has no economic meaning whatsoever,” says Kelton.  “None.”

Currency by keystrokes

These days, you might see Kelton presenting her out-of-the-box economic perspective at financial industry conferences – most recently at the Financial Planning Association’s Retreat and the Northern California Regional Conference – and you are starting to hear similar ideas expressed in the op-ed pages of the Financial Times and other media outlets.  She describes herself – and a number of other influential economists – not as a deficit hawk (Pay off the debt now!), or a deficit dove (Pay off the debt as soon as the economy is stabilized!), but as a deficit owl.

See full article on Why Deficits Don’t Matter by Bob Veres, Advisor Perspectives

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