On why a Government should run deficits

**seireikhaan** · 12-02-2008, 20:11

Couple interesting articles my macro econ prof linked us to regarding government deficits and surpluses, and their impacts. Note that the articles are fairly simplified, so it shouldn't be too difficult a read.

http://www.cfeps.org/pubs/sr-pdf/Spe...port2000-2.pdf

http://www.cfeps.org/pubs/pn-pdf/PolicyNote2006-1.pdf

Thoughts on this? I think there's a slight issue with his logic- it assumes that the private sector will indeed actually save, and not just continue its own deficits to increase spending. I think that's been part of the problem that's led to the current economic downturn; the private sector, instead of saving its extra coin, spent even more and leveraged up to the hilt in debt, and when things started coming downwards, the whole thing toppled into a massive avalanche.

**seireikhaan** · 12-09-2008, 04:07

REALLY? Nothing? Sheesh...

People ask for data all the time, I link to some regarding an actual issue that gets bickered about all the time, and the thread doesn't just die, it never even kicks to life in the first place.

**Mangudai** · 12-09-2008, 07:05

I read it and thought it was good.

The basic idea is that savings are credit owed to us by other people. The set of all people cannot save in the normal financial sense. A subset of the people can save in proportion to another subset which is borrowing. This is an important observation and it seems sound with regard to financial instruments, i.e. paper that promises to pay interest. Economists are not so good at figuring out the value of saving the rain forest or other types of saving.

**CountArach** · 12-09-2008, 07:23

The Australian Government is about to run a deficit for the first time in about a decade. I've always been quite Keynesian in my outlook about deficits - the government should spend as much as it has to in order to keep the economy chugging along in a recession. The consequences can be dealt with later when the innevitable boom period follows.

**LittleGrizzly** · 12-09-2008, 18:02

I haven't read it yet... no time... plus im no expert on economics but i have been taking some classes in university recently and i will make an effort to read it when i get home....

My basic view is something like CA's, Keynseian economics FTW!

The goverment should run a defecit during the bad times in an effort to boost the economy, these debts should be repaid in the good times and left over money put into big public works or tax cuts... or a bit of both....

**Mangudai** · 12-09-2008, 18:59

Keynes was a very smart man with some important ideas. He was wrong about a few things though, for example the consumption function. He also had some humility, he knew that many problems are surrounded by uncertainty, and many problems require a delicate balance. So it scares me a little bit when people seize on simple answers and cite Keynes for authority.

In my view the most important factor for economic growth is an increase in labor saving devices. If we increase our debt in order to build high speed railroads and wind farms, this could pay off above and beyond our interest payments. If we go into debt for consumption, we are stupid.

I'm not so sanguine about national debt. We are currently paying 11% of taxes to service interest on the national debt, this percentage is about to skyrocket.