$1.4 Trillion Deficit? No Problem!

Apparently not all of us live in the same universe. For those of us in objective reality (and if you think there is no objective reality, please do not waste your time telling me so), it is a bad idea to make a habit of spending more than you make, and borrowing should only be done in emergencies or for the most prudent of investments.

Then there are the people in La-la Land, the entrance to which requires that you abandon common sense and become a “progressive economist.” These people claim things like, “It’s perfectly all right to borrow as long as creditors are willing to lend to you,” or, “Deficits don’t matter.” I’ve already posted how Paul Krugman of the New York Times is upset that the federal government hasn’t “gotten serious” about stimulating the economy through deficit spending over the last couple of years.

Now we learn that James Galbraith at UT-Austin’s Lyndon B. Johnson School of Public Affairs is telling Congress that the size of the federal deficit is not a big problem. You see, it’s all because of the “collapse in tax revenues” since 2008 and can be easily solved by “getting banks lending again.” In other words, he wants to restore the illusion of fiscal responsibility to the government by forcing banks to abandon their new-found fiscal responsibility. It’s not like levels of private debt in this country are anything to worry about, right? Or that the size of the federal budget was a problem before 2008? No, sir, America was a model of financial prudence during the housing bubble!

The fallacies promoted by the Galbraith family are multi-generational (see Papa Galbraith’s “classic” The Affluent Society), and the promoters of their ideology are scared witless that there might be a cut somewhere, sometime in the federal budget. They’re sanguine about the building pressure on the dollar and have no solution to the long-term entitlement problem other than to raise taxes more and more on “the rich” and to inflate the obligations away. Becoming a banana republic is acceptable as long as everyone is “equal,” right?

(Thanks again to my wife for forwarding me this article.)

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About Dr. J

I am an Associate Professor and head of the Department of Humanities at Faulkner University. I am also Associate Editor of the Journal of Faith and the Academy.
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5 Responses to $1.4 Trillion Deficit? No Problem!

  1. James Galbraith says:

    The fact that the rise in the deficit since 2008 is due to collapsing tax revenues is not my opinion. It’s a fact. It’s a fact supported by the IMF, a suitably respectable authority. And not just for the United States – this is a fact observed in all the advanced countries.

    I also do not argue that getting the banks to lend again would be easy. Only that an expanding private economy, privately financed, is the only way eventually to reduce public deficits and public debts in relation to GDP.

    In the meantime, the notion that deficits can be reduced by spending cuts is a mirage. The mirage is based on the assumption that you can cut public spending without cutting GDP (national product), and therefore tax revenues. But you can’t, because public spending is, by definition, part of national product.

    Unless you have a corresponding rise in private spending, financed by banks, which brings me back to the point made in the second paragraph.

    I hope this clarifies my views.

    JG

    • Dr. J says:

      First Peter Boettke, and now James Galbraith. It goes to show that you never know what famous economist you’ll run into here at The Western Tradition!

      Now if I could just get Krugman to comment . . .

  2. While it is true that from September 2007 to September 2010 U.S. Government tax receipts fell by $406.2 billion (which is about a 15.8% decrease), government spending increased by $727.1 billion (a 26.6% increase). It certainly makes sense to say that if our tax receipts had not fallen by so much our debt would not be so much. However, to attribute the increase in debt to the drop in tax receipts does not even tell the biggest part of the story.

    Cutting government spending and taxes has been tried before during a recession by the Harding administration between 1920 and 1922. The data show it to have been a great success. The U.S. saw a budget surplus grow from 1920 through 1927. Balancing the budget by reducing spending CAN be done.

  3. Bob Murphy says:

    To follow up on Shawn’s point, the ECB (of all places!) had a bulletin on this over the summer, making the case for fiscal austerity and in particular, for cutting government spending. Now Krugman & Co. had all sorts of objections, but it’s not a simple matter of arithmetic as Galbraith seems to suggest above.

  4. Pingback: Debate of the Century: Krugman vs. Murphy | The Western Tradition

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