Angry Citizen said:
What exactly is the 'huge' deficit doing to us at present? Nothing. It's a number locked away in a tight box. It has no tangible effect on the economy until credit agencies start downgrading our credit en masse or until the dollar starts to depreciate significantly. That is not the cause of the current economic mess. The current economic mess is now being driven by a massive dearth in demand caused by lack of employment and enormous levels of income inequality.
You're relying on a lot of assumptions here. You say the deficit is doing nothing. How are you certain of this? The mere fact that many people are concerned about the future effects of the deficit (such as a credit downgrade or dollar depreciation) mean that it
is having an effect on the economy. This is not a short-term deficit that will end soon, like during World War II, it's a structural deficit, and that entails some possibly big problems for the future. Also I never said that the deficit caused the current economy. But it certainly is not helping with the recovery either.
Regarding the dearth in demand, I agree there, however, I do not agree that "income inequality" has anything to do with that. Income isn't something that exists in a finite supply that is then doled out to members of society by some central authority. Income is based on what goods/services/skills a person has to trade in the economy. Income and wealth inequality are both the natural outcome of a free society.
If anything, more spending to create jobs (which the government most certainly CAN do) would benefit us, not hurt us.
What makes you so certain that the government can create jobs? Or that more spending would benefit? We have thirty years of economic research showing that fiscal stimulus mostly does not work. Government unto itself doesn't create jobs. Any government "job" is the result of borrowing money (taxing the future economy) or taxing money out of the current economy, which means any government job means shorting the private sector of a job.
More spending means taking on more debt, which itself there is a lot of evidence hamstrings the economy once it reaches a certain level, and it is very questionable whether government spending can increase demand at all. It's questionable even whether the government
should seek to increase demand even if it could, because if it does, it might crowd out private-sector demand and private-sector investment (these are things some believe all the stimulus spending in Japan resulted in), and thus keep the private economy permanently depressed. It can also lead to inflation.
Random aside: It is fitting that the levels of income inequality seen today have not been seen since the Great Depression. Causal, or coincidental? Hrm...
I'd say neither. The Great Depression was the result of bad monetary policy at the Federal Reserve and bad fiscal and economic policy by the government. The current crisis is the result of excessive government intervention in the housing market, excessively low interest rates from the Fed, and a complete lack of regulatory oversight of the derivatives industry, along with some other things.
ALTHOUGH...Raghuram Rajan, a Chicago School university economist, who argues that Fannie and Freddie played a large role in the crisis, ALSO argues that inequality (inequality of wealth not income) DID play a role in the crisis in that it caused the government to create the very policies that (as he sees it) led to the crisis occurring.
