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Bad Deficit vs. Good Deficit

Jun 01, 2010 | By: Mr_Blue | Tags: deficit hawks, government spending, budget deficit, stimulus

We know that fiscal policy works. As weak and poorly constructed as it was, the American Recovery and Reinvestment Act of 2009 did save us from an even deeper recession and possible a depression. It did increase the deficit but that should not be a concern when our economy has significant unemployment and weak growth - doing nothing is a lot more costly. But this doesn’t mean that all deficits or any use of fiscal policy is good.

BTW - this article: “Fiscal policy worked – evidence” explains how fiscal policy has worked contrary to what some mainstream economists have said.

Fiscal policy (government spending and tax policy) should have the following objectives:

1) Work to achieve full employment in the economy; and
2) Serve a public purpose - benefit most Americans not a few.

This leads to the distinction between bad deficits vs. good deficits. A bad deficit is one where despite fiscal policy there remains significant unemployment and weak economic growth. Bad deficits are typically a result of poor policy choices such as tax cuts for top income earners, an over-reliance on automatic stabilizers such has unemployment insurance, long and costly wars, or even in the rare circumstance bail out of corporations (ie. Wall Street).

A good deficit is when fiscal policy achieves high employment and strong economic growth. This means investment in public infrastructure and education and yes even tax cuts to middle income families. We know what works - it was done before but our policy makers in DC chose to ignore history and embrace a dangerously flawed economic philosophy that means deficit hawk hysteria and more pain for the rest of us.

Remember: the issue is not the size of the deficit - the issue is who is benefiting from the deficit - that means the difference between a bad deficit and good deficit.

Good luck.