The Deficit Is Not a Problem

 | Feb 12, 2013 | 3:30 PM EST
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Political pundits are having a field day offering up their suggestions of what President Obama should put in his State of the Union Speech tonight.

There's a lot of talk about swaying the public on "balanced" deficit reduction. The public incorrectly views the deficit as a problem because they view it through the prism of their own personal finances. How many times have we heard the president talk about "sitting around the kitchen table" managing our household budgets?

The government's budget is not analogous to a household's budget because the government is a currency issuer whereas a household is not. Under a "fiat money" regime, which is what nearly all major nations have in place today, the government literally issues money by decree. Unfortunately for people, firms and even individual states here in the U.S., that is not the case.

When the government runs a deficit, it is merely adding more dollars to the economy than it is removing in the form of taxation. That money constitutes part of the income and savings of the public. Stated another way, it's part of our financial wealth.

There's only one way the government can balance its budget and that is by removing some of that financial wealth. It does this by taking back more of that money through taxation than it recycles back in the form of spending. Why does anyone think this is good? The government is a sovereign issuer of currency; people are not. The only way for the non-government (that would be us) to get a dollar is for the government to spend more dollars than it removes via taxation. And the government doesn't need to collect back its own fiat in order to spend!

The president had the last four years to explain this. He could have shown how the economy literally turned on a dime the minute the stimulus was enacted back in 2009. He could have said to people that we were losing 800,000 jobs per month prior to the stimulus, but when it was passed we started gaining jobs again. Everything went up.

Instead he talks about fiscal "prudence" whatever that means. Look at the "prudence" being embraced in Europe. How has that helped? The short answer is that it hasn't; it has only made things worse.

Everyone agrees that sequestration and spending cuts and higher taxation will only slow the economy, but those policies are synonymous with deficit reduction, and that is what everyone also agrees we need.

If I were the president's advisor, I'd educate him on how to talk to the American people about the virtues of the deficit and why we need a bigger one. We should expand the deficit to whatever level necessary to get back to full employment because that is the definition of living at our full potential as a nation. I would tell him to say we are going to spend to rebuild our roads, bridges, tunnels, infrastructure, while investing in health care, education, basic science and research and alternative energy. Then tell people that when the government pays for these things, it creates the demand the private sector needs to employ people to create these assets. The economy would boom, people would be put back to work and we'd be restoring and adding to the stock of real capital that future generations are going to need. It would not be a burden on our kids and grandkids, but rather, a rich inheritance. Too bad that mainstream economists and the political class that listens to them have it all backwards.

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