Economist Argues Deficit Helps Economic Crisis Mend

University of Texas economist James Galbraith says there is no long-term deficit problem. He tells David Greene that in an economic crisis, deficits help restore equilibrium. Galbraith says as long as interest rates stay below the growth rate, debt-to-GDP levels will stabilize and even decline.

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DAVID GREENE, host:

And so that supercommittee you just heard about is searching for ways to cut the nation's big deficit. Many Americans have expressed concern about the deficit. Families who say they don't like to carry debt say they aren't really comfortable with the idea of the country being weighed down by the same problem.

Economists have long debated this point. And many say that a federal deficit is not such a bad thing. One economist who holds this view is Professor James Galbraith from the University of Texas. We reached him in Vermont.

You had an article recently in which you called the federal deficit like an IV bag in an emergency room. What did you mean by that?

Mr. JAMES GALBRAITH (University of Texas Professor): Well, the IV bag in an emergency room provides fluids - saline solution - that keeps a patient who's very sick alive.

GREENE: Sure.

Mr. GALBRAITH: What the federal deficit does, the federal government spending in excess of what it takes out of the economy in taxes, is to put money into the pockets of private individuals, businesses. And it keeps them able to continue their consumption. So it buffers the effect of the severe economic shock that we had three years ago and makes it less difficult for ordinary citizens to get through times when their incomes are low and when they may be experiencing bouts of joblessness.

GREENE: Let me just make sure I understand that. So in a tough economic time, it's almost like a measure of the burden being shifted to the government. The government's spending more. Sure, a deficit is forming, but it means there's more money in the hands of people in the private sector.

Mr. GALBRAITH: Yes, exactly so. The federal government's deficit is exactly the extra funds that are being transferred to the private sector - dollar for dollar, penny for penny.

GREENE: Some the sort of alarming numbers about where the deficit and the debt might go are based on the assumption that interest rates will go up. When the Federal Reserve said that interest rates are going to stay low for the foreseeable future, is that another reason that people should not be worrying about these sorts of things?

Mr. GALBRAITH: Well, let's distinguish between the deficit that we have now -which is basically the result of the high unemployment rate and the flat private economy. And then we have these projections for deficits that are supposed to occur over the next 10, 20, 30 years. And those projections are basically computer exercises carried out by agencies like the Congressional Budget Office.

And so they're based on certain assumptions. And one of the critical assumptions is the idea that the Federal Reserve is going to jack up interest rates from the present practically zero to somewhere between four and five percent, and it's going to do that in, let's say, three or four years. And this is extremely improbable. If the Federal Reserve did that, the economy would tank. People would not be able to pay their mortgages. Housing prices would crash even further. Unemployment would skyrocket. So we can safely assume that this projection isn't going to happen.

GREENE: The notion that debt is bad is just something that seems to resonate with people. If you're a politician, President Obama, another candidate, how is arguing otherwise politically feasible? How do you go out there into a cafe or a sandwich shop at a campaign stop in convince people that, you know, you really don't have to worry about this?

Mr. GALBRAITH: I think you have to give people credit for basic common sense and economic intelligence. Americans have been going into debt to buy houses. They've been taking out mortgages, for the most part, until the last few years, very successfully. Every company goes to the bank and takes out a loan in order to finance its capital investment. Corporations issue bonds and keep issuing them, and their debt loads go up.

The difference is that for the government, this is even easier, because unlike a private household or even a company, the government is in control of the means of payment. We need these deficits. We need the government's presence in the economy. Without it, if you just cut back willy-nilly on government expenditure, it's like running through the emergency room and pulling out the IV needles in people's arms. It's not going to help them get better. It will certainly make their condition worse.

GREENE: That's the view of Professor James Galbraith. He is an economist who teaches at the University of Texas.

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