| |

John T. Harvey Contributor


Opinions expressed by Forbes Contributors are their own.


Contact John T. Harvey


Leadership 17,796 views

Why You Should Love Government Deficits




Government Budget Surplus and Private Sector Deficit

Private Government Total
Income $1000 $100 $1100
Spending $1100 $0 $1100
Balance -$100 +$100 $0



Government Budget Deficit and Private Sector Surplus

Private Government Total
Income $1100 $0 $1100
Spending $1000 $100 $1100
Balance +$100 -$100 $0



So, next time you hear Obama or Romney talking about reducing the deficit, be sure you put that into the proper context. They are talking about draining your savings account! That’s hardly a sound policy when we have over 12 million unemployed.


The Big Danger in Cutting the Deficit

Post Your Comment

Please or sign up to comment.


  • Wolf & Rhys Wolf & Rhys 2 years ago


    I still have a hard time seeing how it operationally works.

    Isn’t the government buying tanks and or office chairs what makes up deficit spending? If they spend more than they take in, that’s deficit spending, no?

    Then they are legally bound to sell treasuries to make up for the shortfall. But the selling of treasuries is not the deficit spending, right?

    These sectoral balances are clear to me at a high level. I do get confused by all the Fed operations and I don’t know whether things like QE or Operation Twist have anything at all to do with the deficit.


    Howdy and thanks for reading! I’ll break down your comment and answer a bit at a time.


    Yes, or paying Marines or park rangers or building dams, etc.




    It is what makes the deficit spending possible in the same way mortgages make buying homes possible. But the mechanism here does not make a difference. However the government does it, even if it buys the tanks and office chairs with brand new cash, whenever they are in deficit it means the private sector is in surplus.


    No, they really don’t have anything to do with the deficit spending directly. They could have occurred even were the government in surplus.

  • pauldoc pauldoc 2 years ago

    Hi John,

    I say you are possibly *the* clearest writer out there.

    Regarding selling treasuries to “finance” the deficit: Richard Werner is a German prof in England and expert on Japan. He seems to be one of the good guys (!). He claims that selling government bonds causes “complete quantity crowding out” – and that this has nothing to do with any Ricardian equivalence nonsense. He says government spending has to occur *without* bond issuance in order to work, as I understand it.

    This does not seem to be something anyone in the PK tradition mentions. Can you please help me out here? I’m stuck!

    Hers’s a link

    I am confused as this seems to


    Hi Paul and thanks very much!

    I had a quick read through the article and my feelings are mixed. On the one hand, I don’t think you’d find any disagreement from the PK side that growth and credit expansion go hand in hand. As Keynes said, banks hold the key position in the movement to a higher level of economic activity. I further like the idea that Werner looks for a better defition of money. But, I do not see that nominal GDP substitutes for the value of transations, I don’t undertand how he assumed velocity to be constant, and this sentence troubles me: “This allows a monetarist-creditist synthesis, which describes economic growth as a function of the supply of bank and central bank credit” (p.8). Is he saying that the line of causation is running from money to output?

    I would be very intersted in seeing how Japan spent the fiscal stimuli. That alone can make a huge difference as programs targeted at the poor and unemployed have a much larger multiplier. This is not accounted for in the study.

    Still, it’s interesting and has a nice survey of alternate views. Thank you for pointing it out!

  • I think your example is wrong!! The economy is not a zero sum game. If you go into debt to pay the government should it put people in debt to run it self? I think not. That last example the government spend 30% more then it take in. That is not how the economy works nor ever was a real life example. Who pays the interest? Who supplied the debt. In you example no one have surplus capital. But I guess in the end we are all dead. right?

    Check this like out http://en.wikipedia.org/wiki/Inflation#Related_definitions
    See related definition first line it say “The term “inflation” originally referred to increases in the amount of money in circulation” now you can make up new meaning but this is what it means. The FED is printing money which will lead to the cost of good getting more expensive. You can argue this point but when you go to the store is it cheaper then 4 year ago or does it cost you more money. To buy the same amount.

    Inflation does the opposite of what you say it hurt saving accounts. Core inflation(excludes food and energy) according to http://ycharts.com/indicators/us_core_inflation_rate
    it 2.22 In June. What are you getting in savings 1%. So lets use your example
    1000 in savings
    +10 in interest per year 1%
    -22.22 inflation
    987.78 Total purchasing power in year

    By the way 12 million unemployed it only 4% of the US population not big numbers.

    Let me ask a question what lead us to hyperinflation?

  • Cortina Cortina 2 years ago

    When did you have hyperinflation in the USA.

    Running deficits is normal.

  • Check out this page from Wikipedia


    Scroll to the bottom and you will see the US and the last time we had hyperinflation.

    Also think back to the late 70′s early 80′s what was the rate of inflation?


    Howdy, David, thanks for reading!

    No, it is a zero-sum game in the sense that it is utterly impossible in a closed system for someone to make an expenditure that is not someone else’s income, and one cannot earn income unless it is someone else’s expenditure. This is not a controversial point, at least among economists. Search for sectoral balances and you will many pages not only explaining it, but offering data. There is nothing to say that the volume of expenditures and income cannot rise (or fall) over time, but they MUST be equal.

    With respect to paying interest, the US government does so as it always has. It can never run out of money.

    You are correct that there are people who think of inflation as an increase in the money supply but, a) in 25 years as an economist, I’ve only heard lay people use it that way and b) even then it is based on the false presmise that increasing the money supply causes inflation. It does not and it cannot. See here: http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/

    I never said that inflation helps savings, I said deficits help savings. They do.

    12 million is over 8% of the labor force and it understates the problem by double. It’s a huge level of unemployment!

    You asked what led us to hyperinflation. We have never had hyperinflation so I’m afraid I’m not sure what you are asking. The USA???


    I am not an economic historian and could not say much about the Revolutionary or Civil wars with any authority. However, I would strongly suspect that the culprit in both cases was the fact that the governments continued to increase fiscal spending (financed by new money) in an environment when output could not possibly increase. This means there is a rise in demand with no rise in supply, which leads to higher prices. The same thing happened in Weimar Germany and Zimbabwe. However, none of these scenarios requires an increase in the money supply. Money does not cause inflation, but it can be used to finance the activities (public and private sector) that did. This is explained in great detail here:


    The early 1970s and 1980s are a perfect example. OPEC caused the price increases. That meant that firms and consumers in the US were faced with a need for more cash to carry out transactions, and banks and the Federal Reserve accommodated. Thus, the increase in money FOLLOWED rather than casued the inflation. See this post for more on how inflation actually works:


  • Your right, government has the right to say what the currency is worth. A dollar is still a dollar but that dollar will buy you less.

    We are not in a closed system the FED and bank make loans that are not backed by anything. So if a bank have 1 million dollars in deposits they are allowed to loan up to 10 million. They have to borrow that money from the FED but the FED is not backed by anyone it is its own company. How much Treasury bills does the FED own a lot. Where did they get the money for it?

    As for you deficit helps saving how is that currently working for people core rate is 2.2% not including food and energy, (8.8% with food and energy) T-bill are paying 2.61% as of today. So how is deficits good? You can’t make any money with savings your losing. The FED rate need to go up to get savers a better return.