Why Deficits Matter

Why Deficits Matter

The US is experiencing the strongest price pressures in 40 years. Financial and economic commentators are searching frantically for the culprit. Many on the right blame massive budget deficits. Are government budget deficits responsible for inflation? 

The logic is simple: when governments run deficits, they inject purchasing power into the economy. This stimulates total spending on goods and services, what economists call “aggregate demand.” When aggregate demand rises, production and prices go up. The result is more stuff selling at higher prices.

But there’s a problem here. If you blame fiscal policy for rising prices, you also have to credit it for increased output. You can’t have one without the other. Since conservatives sometimes argue both sides—deficits aren’t responsible for the economic recovery, but are responsible for rising inflation—we need to clear up this misunderstanding.

Over at National Review,…

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