The truth about deficits

Trying to eliminate them will only make the recession worse

The author is a professor emeritus of economics at Chico State.

There are many economic myths, such as: that markets are competitive and self-adjusting; that government spending creates no jobs (tell that to all the police, firefighters, teachers); that the wealthy create all jobs.

Today the most destructive myth is that government budget deficits cause recessions and slow economic growth. A corollary is that those deficits must be eliminated, even during recessions. The opposite is actually the case.

Recessions cause deficits. With less economic activity fewer taxes are paid and more benefits are paid to those enduring the hardships of the downturn. Trying to eliminate these deficits will only make the decline worse. As the economy finally grows, the deficits will diminish on their own as tax revenues then rise and social spending declines.

Letting this financial tomfoolery control the real economy (where resources are utilized to produce goods and services) is putting the cart before the horse.

David Graeber recently published Debt: The First 5000 Years, in which he notes that before monetary systems economic relations were based upon moral and social obligations that were somewhat general and often based on need rather than any quid pro quo. The money system required precise financial obligations among agents and came to control the economy. Social-welfare systems are one attempt to return to the ethical norms of the past.

Until several decades ago financial institutions were seen as intermediaries between those with excess funds—savers, if you like—and borrowers. Now these institutions (some of which can create money) hold the economy hostage to their policies and power.

Human culture created markets, prices, money, debt, corporations and assorted other economic variables. When they no longer serve the common good they can damn well be controlled or eliminated. One example would be the euthanasia of rogue corporations. Is this not what the Occupy Wall Street movement is all about?

Before retiring I had a framed B.C. comic strip on my office wall. The discussion was:

Caveman 1: “What is mankind’s greatest achievement?”

Cavemen 2: “Its social affluence.”

Cavemen 1: “And its greatest failure?”

Caveman 2: “The use of money as an incentive.”