The Deficit – It’s Not What Republicans Want You to Believe

The deafening noise coming from Republicans about the deficit is nothing but a lot of…. noise. Most of these people, especially on the far fringe right, are talking about something that they really do not understand.

Many understand the underlying thought but a picture will help to reinforce the concept. Towards that goal, here is an extremely simplified picture of the economy:

Image for BNV by Harry Deshpande

The concept to keep in mind here is that the economy is a network of circulating money. One person’s income is another person’s expense and vice versa. The salary you are getting tomorrow is money you spent yesterday that has gone around in circles.

What happens when, for example, the shop assistant above loses the job? There is one person spending less money. Since one person is spending less, it is natural that other person’s income will decline. Since the other person’s income has gone down, s/he will have to spend less. That, in turn, means someone else’s income will decrease. This cycle is what creates the contraction in economy.

(Side note: This is the exact problem with Walmart jobs as well. Walmart lowers the cost of living and silently destroys the standard of living as income starts to decline with the outsourcing of jobs.)

One obvious solution to this problem is to expand production. In our example, if one shop assistant loses his/her job then a farmer can work extra hard to produce more. When the farmer starts producing more, he/she will need to buy more as well. When he/she buys more, it becomes income for other people. This kick starts the economy and, finally, the shop assistant can gets the job back because the grocery store is making enough money to hire a person.

This solution will certainly work. This is the solution that the Republicans are asking for. They (especially the extreme right) would like you to believe that the solution will work every time.

The problem is that there are some extreme circumstances in which such simple solution will NOT work.  These circumstances are the ones where sh*t has hit the fan. There is large-scale unemployment, housing crash, wealth destruction and uncertainty.

Yes, I am referring to the crash of 2008. When things reach such an extreme point, it is not possible to reboot the economy by a few farmers producing more. The only option is for the government to print lot of money and push it into the economy. This process short-circuits the ‘my-expense-is-your-income’ cycle by artificially increasing spending. This artificial increase in spending is what kick-starts the economy on a massive scale. Once the economy recovers then the government can slowly drain the money out of the economy.

The deficit that this country faces today is certainly alarming. However, remember that most of the deficit is a legacy of Republican administrations. This pre-Obama deficit was a colossal waste that served no purpose.

The question is what about the deficit created during Obama administration? A large part of this deficit was part of emergency response to the 2008 crisis, which happened before President Obama was elected. Another major part of the deficit has literally gone to waste due to the actions of nay-saying-Tea-Party-hostage-representatives who have willingly allowed themselves to be held hostage to Tea Party demands. If the congress had approved the spending in time — and at a level needed to significantly boost the economy — then we would not have drifted into a deepening crisis thus requiring more money to fix the problem.

The Federal Reserve is absolutely on the correct path with printing the money and keeping a close eye on inflation. Belt tightening austerity measures suggested by Republicans is a quick path to disaster.

If history is any guide then remember that this country came out of the Great Depression of the 1930s only with the help of deficit financing. In fact look at any severe depressions in any country in the last 100 years. Everyone without exception has run large deficits to come out of these severe depressions.


  1. […] people touting this as the ultimate solution do not understand the concept of velocity of money. They do not understand how such an action would have certainly lead to a deflationary cycle that would have been impossible to […]

  2. […] economic prescriptions are equally asinine. The Tea Party politician seemed to suggest our budget deficit (which has been decreasing) is leading to our printing of more money and thus “we pay higher […]