A Mashup of Deficits

The US congressional committee responsible for striking a deficit reduction deal ended its work without an agreement on Monday.  In the debt-ceiling negotiations, politicians (were) debating how to reduce the federal deficit by $2 trillion to $4 trillion over the next 10 years. 

But, you may ask yourself: How did we get here?  

Some say it’s thanks in large part to the stimulus. Others counter, contrary to popular assumption, stimulus spending under the American Recovery and Reinvestment Act has been a very small factor in the expansion.

Nevertheless, stimulus or, government deficit spending, is a central point of controversy in economics. Early 20^th Century economist John Maynard Keynes  argued, in a downturn, the total demand for goods and services falls, triggering unemployment and a drop in production, and only the government could breach the slack in demand.  In 2009 Keynesian economists argued in favor of the US stimulus package and said a larger deficit is better than the alternative of stagnant growth and high unemployment. 

Conservative economists on the other hand countered that lower tax rates and a reduction in the burden of government are how to fix the economy.  They also emphasize that the interest payments on the rising debt will be paid by our children. 

Earlier in the year Congress seemed to heed the call of the conservative camp appearing firmly on the path of austerity, and following the lead set in England.  

But economist Nouriel Roubini, or Dr. Doom, argued more stimulus was needed, otherwise there would be another Great Depression.   It was similar worries by Democratic members of the deficit reduction committee or Supercommittee that led to significant differences of opinion between the policy makers and ultimately a failure to reach a deal. 

“We know that our goal is to reduce spending. But we also know that America faces not just a budget deficit but also a jobs deficit,” said the Democratic members.