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June 4, 2009, 11:17 AM ET
In Praise of Budget Deficits and Fire Trucks
If your house is on fire, do you stop the hoses to prevent water damage to the carpet? Complaining now about the government spending is like scolding the firefighters for using water.
The economy is burning up and the President, Congress, businesses, workers, pensioners, virtually all of us, called 911.
The Euler Hermes Global Insolvency Index reports world corporate bankruptcy rates are at historic highs — the rate is higher in the United States — and will turn “the world economy into a burial ground for business.” Unemployment rates are rising — for men its over 10 percent. (One consequence, EPI reports, is that poverty rates will rise 50 percent for children.) Cities and towns face bankruptcy when their tax base dwindles.
Bad signs everywhere:
Interest rates are at historic lows, a sign that very few want to borrow and invest.
Inflation rates are just up from zero, a sign of worldwide depression of demand.
When you call the the fire trucks, you get the hoses. Deficits dampen depressions and thankfully world governments are using them. Eventually we will have to slow government spending and raise taxes as the economy gets better, but not now.
The deficit magnitudes are not alarming; on the contrary, they are reassuring. Budget deficits are less than 10% of GDP and debt levels are on target.
Deficit hawks in 1936 pressured Roosevelt to balance the budget — which plunged us into the second dip of the Great Depression in 1937, which didn’t stop until the United States entered World War II. The federal government debt is lower as a share of GDP than it was the last time we ended a recession like this one.
Be thankful we have bold policy tools to fight the recession without all the fighting, death, and destruction that come with war.
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