Tag Archives: macroeconomics

Why deficits are bad

There have been many posts here on the blog arguing that government debt and deficits should not be feared, at least not in countries with their own free-floating currency and without foreign currency public debt*. In doing so, I have never discussed the reasons people may have for holding a contrary view. But I have now come across a rather disturbing theory on the news site Alter.net.

It may be that there are some who would like to see an end to government deficits because they adhere to the Chicago school of economics and scoff that Keynes was thoroughly discredited by the stagflation of the 1970s. There may be others who challenge supporters of government spending with a simple question: if too much debt was the cause of the financial crisis, how could more debt be the answer? (Of course, regular readers of the blog will know the answer to this one: the debt build-up before the crisis was private sector debt and for the private sector to reduce debt by saving again, the government must run a deficit**). Still others may think that deficits cause recessions (rather than recessions causing deficits).

But the theory offered by Alter.net is simpler still. Perhaps people think national debt is bad because it actually means a bad economy. Literally. They just do not understand the meaning of the words.

The evidence offered goes back to a US presidential debate from 1992. In the debate, an audience member asks the candidates the following question:

How has the national debt personally affected each of your lives. And if it hasn’t, how can you honestly find a cure for the economic problems of the common people if you have no experience in what’s ailing them?

If you watch the resulting exchange here, it quickly becomes clear that, in the questioner’s mind, “national debt” is in fact synonymous with “recession”. National debt doesn’t cause unemployment, it is unemployment!

Of course that clip is almost 20 years old and it is America, not Australia. But it still worries me. Could it be that part of the reason that it is so hard to have a rational debate about debt and deficits is that some (or even many) of the voting public do not understand what the debate is about? I hope not!

* So the eurozone is a different matter altogether!

** Either that or run a current account surplus…which is still something we have not achieved in Australia.