Susan Feiner, in a recent blog post for Ms Magazine, argues that continuing deficits favor the feminist movement. The post is entitled “A Feminist Economist Speaks Out: Deficits are a Grrrl’s Best Friend”.
Normally I wouldn’t give any time to addressing the arguments of someone who not only refers to her opposition as “hawks” but also intersperses “caw caw” and “squawk squawk” while explaining the opposing argument. While the writing might be tough to take seriously, the underlying arguments are seriously held by many people and deserve rebuttal.
So, are deficits really a girl’s best friend?
Feiner claims that deficits are not harmful because the Treasury can always take out more debt. As with anything in the world though, there are always costs to every benefit. It is true that unlike firms and households, the federal government can create money through the Treasury’s borrowing to pay off its debt. However, like firms and families, the federal government can only borrow when people are willing to lend money. Unfortunately, as seen with the Greek debt crisis, as deficits get larger, people are less likely to want to lend funds as they fear they might not get paid back.
So maybe the U.S. deficit right now isn’t quite Greek crisis bad, yet– but might there be another issue with taking out more debt and creating money? Inflation is the biggest problem with taking more debt. When the Treasury creates new money from debt, it necessarily inflates the money supply.
Feiner states:
“It can spend as much as it likes and borrow as much as it likes. With so many people out of work—nearly 30 million and counting–and so many firms operating well below capacity, there is no danger of inflation.”
Inflation and unemployment are not mutually exclusive. One of the periods in our nation’s history with the highest inflation rate also saw high unemployment. Economists have termed this phenomenon where inflation and recession exist together “stagflation”.
So deficits mortgage the future of our country and create inflation, but don’t they help create economic growth in the short term? Not really. Economist Richard Rahn developed a model called the Rahn Curve that states there must be a level of government spending that maximizes economic growth. Recent research by CF&P shows that the growth maximizing level of spending comes in close to 18% of GDP or less. The current level of spending is near 24% of GDP. Continuing to spend at current levels or higher only inhibits economic growth. Money spent by government is money not spent by the private sector and crowds out investment. But we don’t need an economic model to prove that government spending doesn’t necessarily create jobs and growth- we have the experience of the recent stimulus package and the failed Keynesian policies of the 1960s and 1970s.
Feiner accurately points out that many government programs will have to be trimmed back or cut totally if the budget is balanced. While we could argue all day about whether or not these public welfare programs are efficient uses of money, the fact is that if we continue to take on debt at the current rate, we soon will not be able to fund any of these programs that Feiner and feminists love, because we will fall into our own Greek-style debt crisis. Feiner is wrong: deficits are not a girl’s best friend, they are no one’s best friend.
