Recently I was asked a series of questions by a journalist wishing to write an article about the nation’s current economic situation. What follows in this article and others following over the next week is one of those questions and my answer to it.
How should policymakers balance, as the AP put it, “the competing interests of economic stimulus and deficit control”?
The degree of the negative effects of deficits will depend crucially on how they are created. Increasing government’s role in the economy, increasing spending and taxes, will harm the economy, now and in the future. Reducing taxes and reducing the role of the government in the economy, will benefit the economy, now and in the future. If a deficit is created because the government cuts taxes, then the deficit will be short lived. History has shown that government revenues increase following tax cuts so that the deficits created by the tax cut are temporary. If a deficit is created because the government is replacing the private sector, deficits will be long lived. Increasing taxes to pay for these deficits will reduce government revenues and prolong economic downturns.