I wish I had the ability to put it as clearly as he does.  Government deficits are the mirror image of saving elsewhere; dealing with the government deficit requires that some other part of the economy takes over the savings burden.  Above all, the hopeless hysteria about blame for the deficits gets it badly wrong.

The deterioration in the fiscal position is a result of the cutback in the private sector’s spending, not a cause of it. Not surprisingly, the fiscal deterioration is also biggest where the private sector has cut back most: in the post-bubble economies.Of course, governments could have tried to tighten fiscal positions in the teeth of the crisis. All that would have done is turn the recession into a depression. As a result, they would also have transformed part of the structural fiscal deficit into a cyclical one. This might well have lowered the private sector surplus, but only by destroying private income even faster than spending.

I am very interested to read that even a convinced Libertarian like Megan McArdle is willing to look at EVIDENCE when asking whether the government deficts are the problem or the solution.  That is because she is BRIGHT.

I join with Messrs Yglesias and Krugman in a number of points:

The current budget deficit is not causing our economic problems.  There may be other administration policies that are contributing, but this is not one of them.
Demand for government bonds is robust
There are good and powerful reasons to run a deficit in the current recession

But she goes on to explain why a naive reading of the bond market’s low spreads is unwise.  She is right: markets can have a sudden stop, and convincing them NOW that we have a good plan for the FUTURE is extremely wise.  I don’t think we should cut the deficit yet – but as for talking about spending cuts, hell yeah.  That’s why you should come along to our conference on 12th November (see last post).




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