In a provocative article in Foreign Affairs titled “Who’s Afraid of Budget Deficits?” Jason Furman and Lawrence H. Summers argue that we should not worry much about the federal government’s large and growing budget deficits. While they admit that politicians and policymakers “shouldn’t ignore fiscal constraints entirely,” they say that they “should focus on urgent social problems, not deficits.” And throughout the piece, they assume, for every single problem they address, that the solution is more spending. It’s not surprising that they don’t worry much about deficits.
Furman and Summers aren’t just rank and file economists. Furman, an economics professor at Harvard University’s Kennedy School, was the chairman of former President Barack Obama’s Council of Economic Advisers. Summers, who is president emeritus of Harvard, was the Treasury Secretary under former President Clinton and head of the National Economic Council under former President Obama. I know Summers from when we were both economists with President Reagan’s Council of Economic Advisers and I know Furman from his work. These are not, to put it mildly, dumb guys. And if you dismiss them as such, you make a big mistake. It’s important to look at their argument.
I’ve studied their argument, and I find it unpersuasive in two respects: (1) their main case, which is that we shouldn’t worry much about deficits and (2) their subsidiary point, which is that we need at least the amount of government spending we have now and should be ready and willing to increase government spending.
This is from my latest Defining Ideas article, “Who’s Afraid of Budget Deficits? I Am,” February 20, 2019.
That middle paragraph is there because I sometimes get comments on Facebook and elsewhere to the effect that we can ignore these guys because they’re idiots. They’re not. And I had to read their Foreign Affairs piece 4 times before making my own judgment about it.
READER COMMENTS
John Tate
Feb 21 2019 at 3:38pm
There is a (broken) theoretical link between capitalism, modern monetary theory, and the socialists’ advocacy of “focus on urgent social problems, not deficits.” Briefly: Buy now. Pay later. Capitalism promotes current development with either borrowed money or, especially, shared risk. For the subject application: we improve society today with borrowed money such that society benefits now, and maybe later too. Then we repay that debt by monetizing the debt … in other words, by printed money that subsequent generations inherit dollars that are worth dimes in terms of current value. And exactly who ends up paying for these debt-bought-benefits? Only those with ‘retained earning.’ Why? Because whatever assets are held today and sold tomorrow will have gained only as inflated “paper worth” which will be taxed as a gain; but in fact that gain of inflated worth is really a repayment of the debt.
Benjamin Cole
Feb 21 2019 at 7:09pm
It is probably time to introduce money financed fiscal programs.
Economists such as Ben Bernanke, George Selgin, and Adair Turner have suggested money financed fiscal programs for Japan, but the principle remains the same for any nation.
I tend to look askance at any federal program, from overseas military occupations to domestic welfare spending.
I would prefer a federal policy to keep domestic labor markets as tight as possible. The de facto policy of federal agencies has been to encourage looser labor markets, through Federal Reserve policies and open borders for desperate workers.
The successful pursuit of looser labor markets has had predictable effects upon the voting population, which has turned to socialism as an answer.
It is interesting that AOC also advocates open borders. That girl may know what she is doing.
Side note on federal debt: the Bank of Japan has bought back half of that nation’s heroic level of federal debt, without inflationary consequence. No one ever expects the Bank of Japan to sell off its balance sheet. It may be that federal deficits do not matter, but not for the reasons that Larry Summers says. The evidence is that federal debt can be extinguished or monetized, without consequence.
This flies in the face of accepted or conventional macroeconomic theories, but it is also a historical fact.
Mark Z
Feb 21 2019 at 8:09pm
What urgent social problems do they have in mind? I think every social problem that has historically plagued the country has been getting consistently less urgent for decades. They completely lose me on the issues of education and healthcare: if ever there were two things we should be spending less money on, it’s those two things. Even supporters of socialized medicine seems to acknowledge this, arguing that we could cut costs and ration more without worsening outcome. And one doesn’t have to wholly agree with Bryan Caplan to see that education is largely a positional good, and that (especially higher) education spending probably creates less value than it costs. Unless one has a very sanguine view on the productivity of ‘public investment,’ then as long as the interest rate on government borrowing is above 0, deficits may still be net harmful. Especially when many ‘public investments’ (including many such investments in education and healthcare) actually destroy value in some ways, I don’t think one can even dismiss the fact that government spending often has a gross value pretty close to 0.
Also, global savings rates aren’t going to grow forever; most of the upward secular trend appears to be due to rising savings rates in emerging markets. Those countries aren’t going to be “emerging” forever (and more and more they’re going to start facing rising costs of living that affect advanced economies, especially in healthcare and education). I expect developing countries’ savings rates are likely going to start declining in not too long a time.
I had to rant. Good article!
David Henderson
Feb 21 2019 at 10:59pm
You wrote:
I had to rant. Good article!
Thanks, Mark. Good rant.
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