The right level of deficit spending, long term or otherwise, is the one that coincides with full employment.
Any nation with a non convertible currency and floating exchange rate policy is necessarily not in any case operationally revenue constrained.
A statement from Professors Paul Davidson, James Galbraith and Lord Skidelsky.
We three were each asked to sign the letter organized by Sir Harold
Evans and now co-signed by many of our friends, including Joseph
Stiglitz, Robert Reich, Laura Tyson, Derek Shearer, Alan Blinder and
Richard Parker. We support the central objective of the letter — a
full employment policy now, based on sharply expanded public effort.
Yet we each, separately, declined to sign it.
Our reservations centered on one sentence, namely, “We recognize the
necessity of a program to cut the mid-and long-term federal deficit..”
Since we do not agree with this statement, we could not sign the
Why do we disagree with this statement? The answer is that apart from
the effects of unemployment itself the United States does not in fact
face a serious deficit problem over the next generation, and for this
reason there is no “necessity [for] a program to cut the mid-and long-
On the contrary: If unemployment can be cured, the deficits we
presently face will necessarily shrink This is the universal
experience of rapid economic growth: tax revenues rise, public welfare
spending falls, and the budget moves toward balance. There is indeed
no other experience in modern peacetime American history, most
recently in the late 1990s when the budget went into surplus as full
employment was reached.
We agree that health care costs are an important issue. But health
care is a burden faced by both the public and private sectors, and
cost control is a job for health policy, not budget policy. Cutting
the public element in health care – Medicare, especially – in response
to the health care cost problem is just a way of invidiously targeting
the elderly who are covered by that program. We oppose this.
The long-term deficit scare story plays into the hands of those who
will argue, very soon, for cuts in Social Security as though these
were necessary for economic reasons. In fact, Social Security is a
highly successful program which (along with Medicare) maintains our
entire elderly population out of poverty and helps to stabilize the
macroeconomy. It is a transfer program and indefinitely sustainable as
We call on fellow economists to reconsider their casual willingness to
concede to an unfounded hysteria over supposed long-term deficits, and
to concentrate instead on solving the vast problems we presently
face. It would be tragic if the Evans letter and similar efforts –
whose basic purpose we strongly support – led to acquiescence in
Social Security and Medicare cuts that impoverish America’s elderly
just a few years from now.
Paul Davidson James K. Galbraith Lord
Paul Davidson is the Editor of the Journal of Post Keynesian Economics
and author of “The Keynes Solution.”
James K. Galbraith is a Professor at The University of Texas at Austin
and author of “The Predator State.”
Lord Robert Skidelsky is the author, most recently, of “Keynes: The
Return of the Master.”