Our economy can handle deficits without causing inflation from "summary" of The Deficit Myth by Stephanie Kelton
The idea that deficits are always dangerous is deeply ingrained in our collective psyche. We've been told time and again that government deficits are like personal deficits. We've been taught to think of the federal budget like a household budget. We've been warned that if the government doesn't balance its books, terrible things will happen. Inflation will come roaring back. Interest rates will skyrocket. The economy will collapse. But what if we've been thinking about deficits all wrong? What if the bogeyman of deficits is really a myth? The truth is that our economy can handle deficits without causing inflation. The government, as the issuer of our currency, can never "run out of money" in the way that households or businesses can. The federal government doesn't need to rely on tax revenue to spend. It creates money when it spends. Taxes serve other purposes, like controlling inflation and incentivizing or disincentivizing certain behaviors. But they are not necessary to fund government spending.
When the government spends more than it collects in taxes, it runs a deficit. This deficit is simply the difference between what the government spends into the economy and what it takes out in taxes. And this deficit is not necessarily a bad thing. In fact, deficits can be a powerful tool for achieving important policy goals, like full employment and price stability. By running deficits, the government can inject money into the economy, creating jobs and increasing demand for goods and services.
But won't all this government spending lead to inflation? Not necessarily. Inflation is not caused by deficits themselves, but by the overall level of spending in the economy relative to the economy's productive capacity. If the government spends too much money into the economy, pushing demand beyond what the economy can supply, then inflation can result. But as long as the economy has room to grow – as long as there are unemployed resources like workers and capital sitting idle – deficits can be used to stimulate economic activity without causing inflation.
The key is to use deficits wisely. Deficits should be targeted towards productive investments that increase the economy's capacity to produce goods and services. This can include investments in infrastructure, education, healthcare, and green technologies. By using deficits in this way, the government can not only create jobs and boost economic growth, but also ensure that inflation remains in check.
In short, deficits are not inherently bad. They are a tool that can be used to achieve important policy goals. By understanding the true nature of deficits and how they interact with
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