Tuesday, October 20, 2009

Deficits don't matter that much--Part 3

Some of you have pointed out that Federal Reserve Chairman Ben Bernanke called Monday for the United States to whittle down its record-high budget deficits. See http://www.washingtonpost.com/wp-dyn/content/article/2009/10/19/AR2009101901234.html?wprss=rss_business/economy

True. However that doesn't make my argument and the argument of those economists I cited in an earlier post less true.
No one disagrees that efforts must be made to bring down the deficit at some time. The question is when. Bernake said in his remarks: "Unwinding the stimulative policies introduced during the crisis will require careful judgment." The economists I cited simply believe that it is too soon to focus on the deficit and that what we need is a second stimulus since the first one was not big enough. They are concerned that we still have not done enough to stimulate the economy and, in particular, to create jobs and that shifting focus too soon to deficit reduction would derail the recovery and throw the country back into a deep recession or even depression. It's an issue of timing not whether deficit reduction is ever the right thing to do. Also, I don't think anyone likes deficits. However they are necessary sometimes. For example, few people would argue that we should not have run up a deficit during World War II. Likewise when we were on the verge of another great depression it would not have been smart to do nothing simply out of fear of increasing the deficit. On the other hand, running up huge deficits to fight unnecessary and even counter-productive wars while simultaneously giving tax breaks to the rich as the Republicans did under GW was stupid.

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