Galbraith on the Incipient Emergency (or lack of one)

[David Farber <dave () farber net>]

In Defense of Deficits
James K. Galbraith
Sunday, March 21, 2010
<http://www.thenation.com/doc/20100322/galbraith>

The Simpson-Bowles Commission, just established by the president, will no doubt deliver an attack on Social Security 
and Medicare dressed up in the sanctimonious rhetoric of deficit reduction. What would be the economic consequences if 
the commission did? The answer is that a big deficit-reduction program would destroy the economy, or what remains of 
it, two years into the Great Crisis.

For this reason, the deficit phobia of Wall Street, the press, some economists and practically all politicians is one 
of the deepest dangers that we face. To cut current deficits without first rebuilding the economic engine of the 
private credit system is a sure path to stagnation, to a double-dip recession - even to a second Great Depression.

There are two ways to get the increase in total spending that we call "economic growth." One way is for government to 
spend. The other is for banks to lend.

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits 
put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend 
it as they like. Ordinary people benefit, but there is nothing in it for banks.

And this explains the deficit phobia of Wall Street. Bankers don't like budget deficits because they compete with bank 
loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now there is a 
contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left 
over - a house or factory or company - that will then become the property of the bank.

All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters have 
labored mightily to confuse the issues.

We also hear about the impending "bankruptcy" of Social Security, Medicare - even the United States itself. Or of the 
burden that public debts will "impose on our grandchildren." Or about "unfunded liabilities" supposedly facing us all. 
All of this forms part of one of the great misinformation campaigns of all time.

The misinformation is rooted in what many consider to be plain common sense. It may seem like homely wisdom, 
especially, to say that "just like the family, the government can't live beyond its means." But it's not. In these 
matters the public and private sectors differ on a very basic point. Your family needs income in order to pay its 
debts. Your government does not.

Private borrowers can and do default.

With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing 
numbers into a computer. Because it is the source of money, government can't run out.

It's true that government can spend imprudently. Too much spending may lead to inflation. Wasteful spending - on 
unnecessary military adventures, say - burns real resources. But no government can ever be forced to default on debts 
in a currency it controls. Public defaults happen only when governments don't control the currency in which they owe 
debts - as Argentina owed dollars or as Greece now owes euros. But for true sovereigns, bankruptcy is an irrelevant 
concept.



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