This was printed in the Journal on the Op-Ed page for July 7 with the title "Build a modern version of WPA" with the subtitle "High employment is a symptom that the deficit is too small" This time I liked their title.
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As a convicted deficit denier, I offer the following as counterpoint to the Sunday, June 30 Op-Ed by Carroll Cagle.
A Defense of Federal Deficits
Preoccupation with federal deficits and debt is counterproductive. The $12 trillion national debt held by the public means that $12 trillion in assets are saved in the private sector predominantly in the form of Treasury securities. To reduce the debt, some of those savings will have to be given up. The national debt problem is minuscule compared to unemployment that has resulted in trillions of dollars worth of potential production being wasted never to be recovered.
It all comes down to customers’ demand to buy products. If demand is not sufficient for firms to sell what they produce, they will cut production by shutting down machines and laying off workers. Firms will not ramp up production without increased customer demand. That leaves government spending to prop up demand by getting money into customers’ pockets. Cutting government spending just makes matters worse.
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| A photo taken during the Occupy Wall Street in New York in 2011 and posted on "The Center of the Universe"blog. |
Three such actions are significant. Because these actions are beyond government control, the deficit is largely uncontrollable; it just happens. First, if a single household withholds consumption to save or pay down debt, that household benefits. If the whole private sector saves in aggregate more than usual, overall demand decreases and workers become unemployed. This is the famous “paradox of thrift.”
Second, imports bring the benefits of quality or cost to consumers. But, the spending outside our economy enriches a foreign one and results in unemployment here.
Third, increases in productivity bring benefits to the firm employing them and their customers. Again, unemployment is increased.
As we enjoy the benefits, we should have policies to deal with the resulting unemployment. Instead, we tend to demean the unemployed and let the economy languish.
Simply stated, high unemployment is a symptom that the deficit is too small. Increased federal spending increases demand by putting money into the pockets of customers. Many folks are convinced illogically that deficits inevitably lead to the dire consequences of profligacy, which are high interest rates and inflation, even hyperinflation. These are neither inevitable nor uncontrollable.
Importantly, short-term interest rates are set by the central bank in any country with a sovereign currency. Our central bank, the Fed, will increase interest rates when the economy is doing so well that the Fed decides to cool it off by making borrowing more expensive. In that case, employment will be up and the need for federal deficits reduced.
We usually think of inflation as the result of too much money chasing to few goods. Too much money in circulation can be remedied by taxing some money back out of circulation. Too little production could also cause inflation in which case the remedy is increased production. One thing the USA is (or was) famous for is its ability to rise to the demand for increased production. The two instances of hyperinflation in the modern world were after the fall of the Weimar Republic and Zimbabwe. In each, the means of production were ruined and could not be reestablished rapidly.
Around the globe economies are crashing because of ill-advised attempts to slash the deficit. Politicians have committed their careers to this mistake and must now wait it out while hoping for a miracle. The USA has been spared up until now because of it’s automatic unemployment benefits and a mini-stimulus about four years ago. Unfortunately, we now seem to be hell-bent to follow the course proven to fail.
To reverse course, we need to repeal the sequester and build a modern version of the WPA program that assisted our recovery from the Great Depression.
