More than a Symptom - Deficit is an Economic and Political Tool

Friday’s L.A. Times featured an article by UMKC Economics Professor Stephanie Kelton titled, Forget the ‘fiscal cliff’ (h/t Warren Mosler). The article poses an important question, “Why are we worried about balancing the federal budget at all?” Kelton lays out reasons why the government is dissimilar from households and how budget deficits can actually bolster economic growth and employment. Moving toward the conclusion, Kelton says (emphasis mine):

So in our current circumstance — a growing but fragile economy — policymakers are wrong to focus on the fact that there is a deficit. It's just a symptom. Instituting tax increases and spending cuts will pull the rug out from under consumers, thereby disrupting the income-sales-jobs relationship. Slashing trillions from the deficit will only depress spending for year to come, worsening unemployment and setting back economic growth.

While I agree with the majority of Kelton’s insights and conclusion, I emphasized a specific sentence above because it highlights an area where I believe MMT intentionally obscures the truth. To make my disagreement as clear as possible, I am not denying that the federal budget deficit is a symptom of economic circumstances. My critique is that this statement overlooks countless political decisions, before and during the economic crisis, that set in place counter-cyclical spending programs. This does not imply that programs such as unemployment insurance and food stamps are unwarranted. My point is merely that the direction and size of changes to the governmental budget has been and ultimately remains a political decision.

Despite this criticism, Kelton’s conclusion wonderfully counters the political and mainstream media perspective:

The effort to balance the books that's at the heart of the fiscal cliff is simply misguided. Instead of butting heads over whose taxes to raise and which programs to cut, lawmakers should be haggling over how to use the tool of a federal deficit to boost incomes, employment and growth. That's the balancing act we need.