For most people reading this blog, especially the scientists, budgets matter. Not only is most of the cool science stuff you read about here funded by government funds, but, unless you’re independently wealthy, you’re going to need an uncut, untouched by Peter Peterson Social Security. Regarding budgets and deficit spending, we constantly hear about ‘responsible fiscal policy’–that is, we can’t engage in deficit spending (I’ve dealt with this silliness here and here). But political wishes notwithstanding, unless we want to reduce our savings (the stuff individuals and businesses own), we need deficits. This isn’t ideology or theory, but accounting:

Government deficits create non-government surpluses. It is a simple mathematical proposition; it is neither high theory, nor rocket science. If one sector spends more than it earns, another, by the rules of double-entry bookeeping, earns more than it spends. And so it is with the government–if it spends more than it collects in taxes, it runs a deficit, which is exactly equal to the surplus accumulated by the non-government sector. Deficits create income and profits for the private sector in excess of the taxes the private sector pays to the government.

Like I said, there’s a cost to deficit reduction:

If we demand that the government run a surplus, then we are demanding that we, the private sector, run a deficit. If we are demanding that the government pay off its entire debt, then we must be demanding that every single private portfolio, retirement account, or college fund sacrifice its Treasury securities. Surely the private sector does not want that. The government’s deficit is someone else’s surplus and the government’s debt is someone else’s asset….

Recall the Clinton surpluses. What was then considered to be a very ‘prudent’ government stance was in fact only possible because the private sector acted ‘imprudently’ and ran negative savings for many years…. Presumably, we’d prefer the private sector to save and accumulate financial assets, which means that the government must run a deficit and accumulate financial liabilities…. Because most people do not think about this basic accounting result, they tend to think that a responsible government is one that acts like a household, without recognizing that a ‘responsible’ government is possible only with an ‘irresponsible’ private sector behavior and vice versa.

Or as James Galbraith put it recently (italics mine):

So the public debt simply increases from one year to the next. In the entire history of the United States it has done so, with budget deficits and increased public debt on all but about six very short occasions–with each surplus followed by a recession. Far from being a burden, these debts are the foundation of economic growth. Bonds owed by the government yield net income to the private sector, unlike all purely private debts, which merely transfer income from one part of the private sector to another.

It’s a post-Bretton Woods, fiat currency world; we just live in it.

So does this mean we should just shut down the IRS, print an extra few trillion dollars, and hand out the money? No. What this means is that we have to recognize what ‘deficit reduction’ and ‘fiscal responsibility’ mean in the context of a suboptimal economy. It is a conscious decision, in the face of massive unemployment and underemployment, to prevent even modest inflation–which helps the wealthy with large amounts of dollar-denominated assets (e.g., T-bills and corporate bonds). Now, that is an ideological decision. That is a political decision (and, in my opinion, a stupid one). Conversely, increasing the deficit is a decision to help the unemployed (not to mention tighten labor markets which also helps the employed) at the expense of the wealthy. Personally, I would prefer a mixed strategy of wealth transfer (a more progressive income tax code, fewer deductions, higher capital gains tax, and a transaction tax) combined with some deficit spending.

This would reduce any effects of de facto asset depreciation for middle and upper-middle class families, while, at the same time lower the inflated prices of inelastic goods, such as housing and education. Regardless of one’s policy objectives, the point is that the deficit is an account balance. Whether or not it is a statement about the health of the economy depends on how we accumulate that deficit. Rebuilding our infrastructure, providing healthcare? Good actually. Giving wealthy people piles of cash that they either spend stupidly or invest speculatively? Not so good.

And keep in mind that the coming debate over ‘fiscal responsibility’ and deficit reduction (and mark my words, Obama will betray the Democratic rank-and-file on this too) is occurring entirely of an economy that is underperforming in that we have unmet needs (e.g., over a trillion dollars each to repair bridges and roads) and high levels of unemployment*. If we want to increase savings for all, including the middle and lower class, then deficits will have to be part of the foreseeable future.

One more thought (that might become a blog post!): while everyone gets hot and bothered about The Information Revolution That Will Change Everything, we, as a society, haven’t really come to grips with the changes in money–which is a pretty key innovation. Money isn’t what it used to be….

*As Atrios often quips, I’m old enough to remember when ten percent unemployment was a catastrophe. Apparently, it’s now the new normal.