Why so-called​ deficits​ are economic necessities

22 Oct, 2018 at 09:45 | Posted in Economics | 10 Comments

wvickreyWe are not going to get out of the economic doldrums as long as we continue to be obsessed with the unreasoned ideological goal of reducing the so-called deficit. The “deficit” is not an economic sin but an economic necessity. […]

The administration is trying to bring the Titanic into harbor with a canoe paddle, while Congress is arguing over whether to use an oar or a paddle, and the Perot’s and budget balancers seem eager to lash the helm hard-a-starboard towards the iceberg. Some of the argument seems to be over which foot is the better one to shoot ourselves in. We have the resources in terms of idle manpower and idle plants to do so much, while the preachers of austerity, most of whom are in little danger of themselves suffering any serious consequences, keep telling us to tighten our belts and refrain from using the resources that lay idle all around us.

Alexander Hamilton once wrote “A national debt, if it be not excessive, would be for us a national treasure.” William Jennings Bryan used to declaim, “You shall not crucify mankind upon a cross of gold.” Today’s cross is not made of gold, but is concocted of a web of obfuscatory financial rectitude from which human values have been expunged.

William Vickrey


  1. Vickrey does not actually explain in that passage why deficits are needed, though maybe he does elsewhere. The reason why deficits are needed is as follows.

    The private sector has a desire for financial assets, including base money and government debt. If it is not supplied with those, it will try to save in order to acquire them. But saving, as Keynes explained, cuts demand and raises unemployment. Ergo government absolutely has to supply the private sector with the stock of base money and government debt that the private sector wants, and government does that by running deficits.

    • Ralph
      ” But saving, as Keynes explained, cuts demand and raises unemployment.”
      Where did Keynes say this?

      • Chapter 13, pg 185 ‘General Theory’ last sentence is “A decreased readiness to spend will be looked on in quite a different light if, instead of being regarded as a factor which will, cet. par., increase investment, it is seen as a factor which will, cet. par., diminish employment.”

        Thankfully Ralph writes more understandably than Keynes.

        • A decreased level of spending is not the same as saving.

          • For a given income it is. No?

            And no matter your answer I am not going to spend any more time trying to read that horrible, horribly inscrutable book 🙂

            • If the income is fixed how can saving change it?

          • Looking at the private sector only, it is. Aggregate spending must match income. My spending is your income. If aggregate income go down saving must increase. I don´t spend all my income. Spending could go up using credit, risking being overindebted. Wanting to reduce debt is saving. If spending go down demand decreases while unemployment rises. Forgetting the external sector the government sector can make up the slack by increasing demand by creating financial assets(deficits). I think!

    • Decisions to spend or save in the business sector depends on business-cycle outlook generally. Demand for riskfree-assets with interest like government bonds is always attractive. But even more during business-downturns. I don´t think they save just to acquire them but to reduce the risk of spending to much(loosing money).

  2. Interesting post as always. Nice reply, Ralph.

    My page on MMT: https://homosociologicus.com/neoliberalism-3

    You might enjoy Steve Keen’s article that I saw today. Won’t let me share link. But title is: The WHO* warns of outbreak of virulent new ‘Economic Reality’ virus

    • Keen’s article is both amusing and instructive (I did read it last year when published in ROKE) 🙂

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