Galbraith: The danger posed by the deficit ‘is zero’
EK: But putting inflation aside, the gap between spending and revenues won't have other ill effects?
JG: Is there any terrible consequence because we haven't prefunded the defense budget? No. There's only one budget and one borrowing authority and all that matters is what that authority pays. Say I'm the federal government and I wish to pay you, Ezra Klein, a billion dollars to build an aircraft carrier. I put money in your bank account for that. Did the Federal Reserve look into that? Did the IRS sign off on it? Government does not need money to spend just as a bowling alley does not run out of points.
What people worry about is that the federal government won't be able to sell bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy. My father said this process is so simple that the mind recoils from it.
EK: What are the policy implications of this view?
JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we'd be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I've supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That's one difference between us and Europe.
EK: That does it for my questions, I think.
JG: I have one more answer, though! Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets.
The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now. The Greeks are being asked to cut 10 percent from spending in a few years. And the assumption is that this won't affect GDP. But of course it will! It will cut at least 10 percent! And so they won't have the tax collections to fund the new lower level of spending. Spain was forced to make the same announcement yesterday. So the Eurozone is going down the tubes.
On the other hand, look at Japan. They've had enormous deficits ever since the crash in 1988. What's been the interest rate on government bonds ever since? It's zero! They've had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return. The idea that funding difficulties are driven by deficits is an argument backed by a very powerful metaphor, but not much in the way of fact, theory or current experience.
Speechless. James Galbraith and I live in different worlds. I find it hard to believe that people believe him.
As Michael Kinsley noted, if deficits aren't the problem and will never be the problem, why not spend more? Why aren't we doing more for the poor? Why aren't we doing more for the unemployed? If deficits don't have any drawbacks, why not double the deficit? Even that would be wrong if you could triple or quaduple the deficit instead without any ill effects. The reason we don't is because the whole system could collapse.
James Galbraith will be first against the wall when the revolution comes. Sphere: Related Content
5 comments:
Shakes: Did you really expect anything different to come from the blowhole of J.K. Galbraith's son?
These rich blowhard Hahvahd Yahd snobs live in an entirely different world from the rest of humanity.
I know. His father was delusional too. The depth of his denial is stunning. Welfare states are collapsing and he thinks we aren't spending enough. Staggering.
Hey Shakes: I reposted this on my blog (W/ full credit and link back of course). Hope that's OK with you
I tried to post the following in response to James Galbraith's same interview on other forums and news sites, but no luck so I am posting here.
I see a lot of praise expressed by commenter's for Mr. Galbraith.
He said that USA had 6 brief periods of surplus after 1790 and all resulted in recessions. Now USA had 29 recessions (as of my knowledge) after 1790 and 23 were despite deficits, hows that?!?
Thats means 23 recessions were despite deficits and if deficit can not prevent recession, how the hell can deficit fix the recession? Latest example is current recession which was caused despite $500 Billion deficit which was at that time historically high. if Galbraith's theory of deficit spending work then we wouldn't have recession at first place.
I always wondered why countries hyper-inflated, and wasn't there a single economist who can warn government of out of control money printing. Now I know that economist like Galbraith are in fact trusted economist for rulers because people and politicians alike like his advises. Result? Absolute disaster.
Libertarian Advocate, you can have standing permission to take anything you want from this blog. Thanks for the link.
Bill Investor, you make a great point about how some economists tell the ruling class what they want to hear.
Printing money and overspending is the easy route. Cutting the size of government is the hard route. You would have a tax revolt if you tried to balance the budget by increasing taxes on everyone, and you will have social unrest in our entitlement society if the welfare checks run out.
My biggest fear has always been the collapse of the dollar. Some people think that is crazy, but it suddenly looks a whole hell of a lot real after watching Greece and the Euro.
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