The dangers of deficit reduction

Joseph E. Stiglitz:  -

A wave of fiscal austerity is rushing over Europe and America. The magnitude of budget deficits — like the magnitude of the downturn — has taken many by surprise. But despite protests by yesterday’s proponents of deregulation, who would like the government to remain passive, most economists believe that government spending has made a difference, helping to avert another Great Depression.

Most economists also agree that it is a mistake to look at only one side of a balance sheet (whether for the public or private sector). One has to look not only at what a country or firm owes, but also at its assets. This should help answer those financial-sector hawks who are raising alarms about government spending. After all, even deficit hawks acknowledge that we should be focusing not on today’s deficit, but on the long-term national debt. Spending, especially on investments in education, technology and infrastructure, can actually lead to lower long-term deficits.

Faster growth and returns on public investment yield higher tax revenues, and a 5 to 6 percent return is more than enough to offset temporary increases in the national debt. A social cost-benefit analysis (taking into account impacts other than on the budget) makes such expenditures, even when debt-financed, even more attractive.

Full Story: Joseph E. Stiglitz: The dangers of deficit reduction.