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Thursday, June 25, 2009

The Need for Deficit Spending

As a follow up to the post Don't "Nullify" Fiscal Policy which was part of the Romer Roundtable on fiscal policy mistakes during the Great Depression, in particular the mistake made in 1937 of giving into pressure to balance the budget before the economy had recovered sufficiently causing an economy showing signs of recovery to fall back into depression, David Cay Johnston emails this explanation of the need for deficit spending after large negative shocks from his February 18, 2009 "Johnston's Take" column at Tax Notes:

In the long run we need more savings and investment, but as Keynes famously noted, in the long run we are all dead. What we need right now is money in people's pockets to pay for mortgages so more houses do not fall into foreclosure and employers stop eliminating jobs at an accelerating pace, a rate of nearly 10,000 per day last year and 20,000 per day last month.

Borrowing our way out of this is not without risk. But imagine for a moment that you just got married, bought a house, and are expecting a baby, and your cars unexpectedly broke down. Do you take on more debt by leasing or borrowing for two new cars so you can keep getting to work to pay for the mortgage and the baby crib, or do you shun new debt because it is more prudent to do so?

    Posted by on Thursday, June 25, 2009 at 12:10 AM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (17)

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