Written for Deficit Hawks who want to have a balanced budget; a chain of thought induced by this comment thread at Naked Capitalism. In case this argument has been made before, I would like to know the great mind that thinks alike to mine, at least so I can credit it.
Think of the capitalist framework as a form of economic diabetes in the body of the national economy. The lack of insulin brought about by this disease erodes your body over a long period of time – similar to how inflation implied by a capitalist structure(2) erodes the nominal value of a unit of money(1). With efficient intervention on an ongoing basis, both the effects of inflation and diabetes can be controlled so that everything functions in a stable way. In most situations, brief periods of high inflation/blood sugar do not adversely affect the long-term scenario(3). Deflation, on the other hand, is like being affected by a hypoglycemic state. The effects on a diabetic are immediate and very likely to cause irreparable damage in the most vital areas of the body such as the brain and the heart.
By most accounts, including some of the literature I have read(long in the past) regarding the great depression of the early 1930s, it is far more likely that budget-balancing will lead to deflation(4) than deficit spending will increase inflation. In a capitalist economy, you get to pick your poison.
- This is all assuming a fiat system where money is issued by the national government at its discretion rather than based on some fixed value.
- re-posting my comment re: Fiat Money for my edification
“When the government spends money, for bombs and bullets, for a stimulus package, to service medicare and social security payments; the money comes from either taxes or debt.”
the money actually comes from the FIAT power of the government to create money. In this, the US dollar is no different from the Disney dollar. Can you imagine going up to tell Walt Disney Corp. that they can’t print Disney dollars to use on their property? Why would you think you can say the same thing to the US treasury?
- Capitalism necessitates unrelenting growth. Growth implies Inflation.
- A scenario, as observed by Mr. Keynes, where we will no longer be around to have a say.
- Some authors have in fact pointed out that most of the big lulls of the US economy in particular, have come right after a period of what is called ‘fiscal restraint’ – with the most obvious example being the dot-com crash, when the US government was supposed to be running surpluses