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Do deficits matter? Show more Show less
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For decades, politicians and economists have condemned deficits as evil. Today, there is a lively debate about whether deficits matter and whether there are advantages to running them. Most notably Modern Monetary Theory encourages the government to run deficits in order to achieve its objectives of full employment and investment.

Moderate deficits are good, very high deficits lead to problems Show more Show less

Rather than a binary disagreement that deficits are good or bad, it is reasonable to conclude that small deficits are irrelevant to the broad economy, and only high deficits financed by central bank accommodation create inflation
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Debt, broadly speaking, is money we owe to ourselves

Most debt that governments take on is owed to its own citizens. Debt is a liability, but every liability is someone else's asset. Debt involves a transfer from those who pay taxes to those who own bonds and the money stays in the economy.
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The Argument

People think of debt’s role in the economy as if it were the same as what debt means for an individual. Lots of debt is a very bad thing for a person. However, the debt we create is basically money we owe to ourselves. Debt is rarely owed entirely to another country, and most debt is paid from taxpayers to bondholders, via the government. This involves distributional issues in the country, but these are separate issues to whether debt itself is good or bad and sustainable or unsustainable.

Counter arguments

This argument ignores a few key issues: - Even when all debt is domestically held, this argument ignores strong distributional effects. Those who pay taxes will be transferring money to those who own bonds. For example, billionaires could be the bondholders and middle class people could be the taxpayers. - Even if the debt is all internally held, high deficits can still lead to excessive aggregate demand and higher inflation. - For some countries a high proportion of the debt is not held internally and is in fact owed to foreigners. This leads to currency crises and transfers money from locals to foreigners.


Rejecting the premises


This page was last edited on Thursday, 27 Feb 2020 at 12:35 UTC