Thursday, March 1, 2012

The Deficit and the Great Recession

I've thought about this for awhile, and I've come to the conclusion that the solution to the current deficit versus growth problem is pretty simple. Right now, the problem is growth. We appear to be finally in a nascent recovery. The stock market broke 13,000 for several days now. Unemployment claims have moved downward to an average which will bring down unemployment Fourth quarter economic growth is now measured at a healthy 3%.

Let me stress the word nascent. Now is still not the time to focus on deficit reduction. A contraction of government spending could send growth down into low digits and continue our economic stagnation. We need to maintain our current level of spending with longer unemployment benefits, the payroll tax deduction and maintenance of key safety net programs that will boost spending.

After growth appears to have stabilized, the problem for economic policy-makers should shift to inflation. All the money pumped into the economy will begin to tighten. This is now the time to begin cutting the deficit. You do this for two reasons. One to slow economic growth and prevent inflation. The other is to ensure that current generation pays its economic debts rather than shifting them to our kids.