Everybody’s Favorite Economist (tm), Larry DeBoer, has a good post at Capital Comments about the nation’s budget deficits, the national debt, and the likely consequences of austerity measures during a recession.
Big future deficits are a problem. Big deficits now, not so much. They’re the result of the recession. Tax revenues are way down because of all that unemployment. Spending is up, partly because of added entitlement payments, and partly because of the government’s stimulus spending. But deficits during a recession help. The extra spending and reduced taxes increase the sales of goods and services, which give businesses a reason to employ more people. Without the deficits, unemployment would be even higher.
With unemployment near 10 percent it wouldn’t do to try to reduce the deficit now. The federal government tried that during 1937-38. With the unemployment rate still at 14 percent, the Roosevelt administration cut spending, and Social Security taxes were first collected. The deficit was reduced to near zero – and the economy dropped into recession. Unemployment rose to 19 percent.
We do need a long-range plan to reduce deficits to less than 3 percent of GDP. We need to balance the budget eventually. But not now.