Is it Sometimes Good to Run Budget Deficits? If so, Should We Admit it (Out Loud)?
33 Pages Posted: 30 Mar 2007
There are bad deficits and there are good deficits. What makes a fiscal deficit good or bad depends on both the context in which the deficit is run and the reason that the deficit is rising. The belief that it is unquestionably foolish to adopt policies that directly or indirectly increase the government's annual borrowing on the financial markets - which is what it means to run a budget deficit - is not the universal truth that the current conventional wisdom might imply. Budget deficits are potentially dangerous and must be monitored carefully, but they are not always, inevitably, completely, and irreversibly horrific. Far from it.
Knowing that deficits are not evil incarnate raises some difficult questions, however, most notably whether it is dangerous for policy makers or economists to admit publicly that deficits might sometimes be the result of wise policy choices. While there is always a danger that such knowledge can be distorted and misused, I argue in this article that we have a responsibility to adjust our public discussion of budget deficits to admit that there are good deficits as well as bad. Enhancing the discourse requires us to remind ourselves what it is about budget deficits that can make them harmful, both in the long term and the short term, as a necessary step in understanding when deficits can be beneficial. Only then can we have a full and honest discussion of our taxing and spending policies.
Keywords: Budget Deficits, Public Investment, Crowding Out, Fiscal Responsibility
JEL Classification: E62, H62
Suggested Citation: Suggested Citation