Rationale for Deficit Spending:
Australian economist Bill Mitchell explains:
At last count there were two broad macroeconomic sectors – the government and the non-government. The non-government sector can be decomposed into the private domestic sector and the external sector. The private domestic sector can be further decomposed into households who consume and firms who invest (in productive capital).
Macroeconomics is easy – thats it! 2 broad spending sectors and then some more detail.
What do we know about these sectors in the US?
1. Households are not spending enough on consumption – and why should they given they have to reduce their unsustainable debt levels and are saving to generate buffers just in case they are next to join the unemployment queue.
2. Business firms are not spending enough on investment – and why should they given they have to reduce their unsustainable debt levels and that household spending is not pushing production levels beyond existing capacity (by a long margin).
3. The external sector is deteriorating – that is, spending is contracting because the Europeans and the Brits are killing growth in their economies.
How many more spending sectors are left in the US?
The most basic macroeconomic rule – spending equals income. When someone spends another gains income. When a sector increases spending, other sectors enjoy the rise in income.
So if all these non-government sector spenders are being cautious and the private domestic sector is attempting to save overall – and – the world economy is not going to drive US exports very hard – where is the deficit spending going to come from to drive growth?
There is only one source – government budget deficits.
More of A veritable pot pourri of lies, deception and self-serving bluster at http://bilbo.economicoutlook.net/blog/?p=20782
Growth requires spending. There are only a few possibilities – consumption, investment, government and net exports.
If net exports are draining spending (that is, the nation is running a Current Account deficit), then the options narrow for which sectors will run deficits (spend more than they earn).
If the private domestic sector desires to spend less than it earns overall (that is, net save – saving greater than investment), then the options narrow to maintain growth narrow to one – the government sector has to run an on-going deficit.
If the government tries to run on-going surpluses (or even balanced budgets) then it is also signalling that it is happy that the private domestic sector is running persistent deficits (as flows) and the stock implications of that are simple – they will be accumulating increasing levels of indebtedness.
The problem with this strategy is that it is unsustainable and eventually the system will crash under the burden of the private debt.
The other option is that the government surplus desires are matched by surplus desires in the private domestic sector and the result is a major recession.
It is really that simple.
Second, the following, from Keynes, is fantastic. From a 1933 radio debate Keynes did with Stamp (my bold, though I should bold all of it):
You will never balance the Budget through measures which reduce the national income. The Chancellor would simply be chasing his own tail – or cloven hoof! The only chance of balancing the Budget in the long run is to bring things back to normal, and so avoid the enormous Budget charges arising out of unemployment…Even if you take the Budget as your test, the criterion of whether the economy would be useful or not is the state of employment…I do not believe that measures which truly enrich the country will injure the public credit…It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself.