James Galbraith: Why the Deficit Doesn't Matter

TAP talks with James Galbraith about the deficit and what we really should be looking for in the president's budget

This week, President Barack Obama released a budget that, as promised, cuts discretionary domestic spending in key areas in the name of deficit reduction. But he left big entitlement programs mostly untouched, which fueled fire on Republican-led efforts in the House to slash even more.

The cry from most progressives, and many economists, that deficits don't matter while unemployment hovers just under 10 percent has gone mostly unheard by the American people. But there's another cry: that the deficit doesn't matter at all, at any time. TAP talked with James K. Galbraith, the Lloyd M. Bentsen Jr. chair in government/business relations at the University of Texas at Austin, who might be the country's biggest deficit dove.

Why doesn't the deficit matter right now?

The deficit is an outcome; it's not a policy tool. The current deficit happened because of the weak state of the economy and because of the international value of the dollar. The notion that you're going to get rid of deficits by cutting spending and raising taxes is false. It's an uninformed position. As you raise taxes and cut spending, you weaken the economy.

It's not that it matters whether it goes away or not, but the point is, it's bad policy.

What would reduce the deficit?

The deficit will not go away and should not go away, but it will be diminished or reduced only when we have restored growth funded by the private sector. There are two ways to generate economic growth: private credit or public spending. That's the entire set; there are no other alternatives. So long as the private sector is not funding economic activity ... the public sector is going to run a big deficit. The public sector can be actually doing things, or it can be giving money to people through unemployment insurance and [similar programs].

What do you wish people were discussing regarding the budget?

Does it deal with unemployment, does it deal with the foreclosure crisis, does it deal with the infrastructure deficit, does it deal with energy security, does it deal with climate change? In a real world, those issues are the important issues.

Does it do those things?

I defy you to find me a single news story on the initiatives in this budget that deal with any of those questions. Infrastructure it talks about a little bit. The other four, nothing of consequence.

Are there any circumstances under which lawmakers should be having a discussion about the deficit like the one they are having now?

If they were in Argentina maybe.


Because Argentina borrows in a currency it cannot control. A failure to understand what the United States is, is an interesting phenomenon. A failure to understand the United States is different from Greece is an interesting phenomenon. It reflects a genuine ignorance about what the United States is or a deep belief that the people to whom one is speaking are very stupid.

Are there times when deficits matter?

The United States has been running budget deficits practically without stop since the early part of the 20th century. Only once or twice -- 1997 to 2000 and 1969 to 1970, maybe 1959, 1960 -- it very briefly went into surplus. Each of those times was followed by a major recession.

The lesson one should take away from this is that budget deficits are normal; budget surpluses are abnormal and dangerous. The notion the budget should be balanced is a notion unsupported by our history or the history of any other large industrial country. Why it has become an obsessive fixation of the political discourse is an interesting question.

Why do you think it has?

It provides a cover for people whose real agenda is to cut government spending, to cut Social Security, to cut Medicare, to cut every kind of program that benefits low-income people, that benefits cities, that benefits the public-sector unions. The deficit is an umbrella argument to draw attention away from what is being done.

What should we ask the deficit hawks?

You might ask, What is supposed to be the economic benefit of a policy that reduces budget deficits? Nobody can say. Nobody tries to explain this. Behind this, there's some idea that at the present, that a large budget deficit is unsustainable. Nobody defines that term. It gets repeated a lot, but it is never defined in a systematic way.

As best I can see, there is fear that somehow the capital markets will withdraw funding to the United States government. People who think that do not understand how capital markets work. They have no response when you point out the capital markets are not worrying about the deficit, because if they were, they would not be lending to the United States as they keep doing and have been doing consistently since the crisis.

Is there an answer to why it matters?

It's detached from economic reality. It's clear what's going on here is a process of consolidation in discourse. It establishes certain things that are safe to think, certain things that are dangerous to think, and things people are afraid to say because they'll get shut out of the discourse. This is exactly the process that got us into the Iraq War. ... The fact [dissenters] were right was not discussed until it was too late.

This Q&A has been edited and condensed for clarity and length.

Monica Potts is associate editor for the Prospect. Her work has appeared in The New York Times, the Connecticut Post and the Stamford Advocate. She also blogs at PostBourgie.

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