Thursday, July 6, 2017

Peter Cooper — Truth and Lies About Government Deficits

There is a lot of misinformation spread by politicians and much of the media on the topic of fiscal policy, particularly when it comes to the role and impact of government deficits....
There is a basic distinction that needs to be kept in mind to avoid falling for the lies. It is that although changes in government policy have an effect on the economy, the final fiscal outcome depends on what happens, partly as a result of those policies, to income and employment. This is why a larger fiscal deficit can occur alongside either weak income and employment (a “bad deficit”) or strong income and employment (a “good deficit”).
In reality, a currency-issuing government’s fiscal position is not important in itself. What matters is that the government’s fiscal policy is appropriate to the economic circumstances. During a period of economic weakness, the important point is to facilitate a sustained recovery. Once recovery is under way, incomes and tax revenues revive. The fiscal deficit narrows automatically as a result, although this is really neither here nor there. What matters is the strength and sustainability of the economic recovery.

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