Mainstream Deficit Absurdity

There is an argument being made in mainstream and Keynesian circles that the deficit must not be cut because otherwise what little recovery there has been in the economy so far would be damaged and perhaps erased. This is in response to false cuts proposed by Republicans such as Representative Paul Ryan who only proposed a reduction in the rate of increase and not a single actual cut, and also in response to arguments by libertarians that reducing the deficit is vital to restoring some economic order.

From an Austrian perspective, this argument is rubbish. The biggest threat to the economy of the United States as well as the rest of the world is the loss of value of the dollar, caused primarily by the low interest rate policy of the Federal Reserve in support of the expansive deficits of the Federal Government. If the Federal Government were to significantly reduce spending, there would be no reason for the Federal Reserve to keep interest rates so low, and therefore the decline in the dollar can at least slow, and perhaps even stop or even reverse.

From the modern Keynesian perspective, the support from the argument comes from the recession of 1937, the recession inside a depression, which is blamed on an alleged desire by the Roosevelt administration to reduce federal spending. A refutation of this particular argument can be found at the VonMises website with the article The Dangerous Lesson of 1937 by Jonathan Finegold.

Jonathan Finegold wrote his article in response to attempts by Keynesians to answer a difficult question: given that they had predicted recovery, and it would be difficult to admit that they were wrong, they had to find a justification to refer to the ongoing malaise as a double dip.

That it is being dragged out again in response to the desperate need to balance the budget is yet more evidence of increasing desperation among those in the political class and their supporters, and the crash that will inevitably come unless the fiscal policies of the United States government are reversed.

For decades, not changing course was the only way to maintain the status quo. The problem now is that no matter what is done the status quo is finished. The only reason to not change course now is to avoid admitting error, which for some people is more critical than being right. Disaster might be a sufficient cause to lock down tyrannical controls on the population. Peacefully giving control over to those who believe in liberty would be, from their point of view, a disaster.