On deficit finance and President George Bush

Nov.19,2005

Two years ago I wrote an op ed in The Globe and Mail Canada's leading newspaper that defended President George Bush's policy of running a deficit to stimulate the American economy through a combination of tax cuts and increased spending in certain areas.

This was a very politically incorrect thing to do and offended some of my friends on the left who resented Bush because of his foreign policies and in particular the War in Iraq. But as I pointed out in the op ed one did not have to agree with Bush on his foreign policy or even aspects of his domestic policy to appreciate the willingness of the Bush administration to make use of appropriate deficits to stimulate the economy. As I said at the time it would have been far more preferable for the President to cut the taxes of the poor far more than the taxes of the rich.

And of course increased civilian spending is usually better than increased military spending. Nevertheless because the Democrats and their ideological allies in Canada had become so dogmatically fiscally conservative it was a welcome breath of fresh air that this compassionate conservative Republican appeared to understand that sometimes deficts were an appropriate policy.

What have been the results? Unemployment has dropped significantly in the US in the past two years and economic growth continues to surprise analysts. Furthermore despite the trade deficit and the public sector deficit the US dollar continues to be a strong currency.

Maybe its time that people re-evaluated their approach to deficits and rediscovered the wisdom of Keynes. Public sector deficits that are targeted on investments in infrastructure, tax cuts for the poor and middle classes and social investments are an excellent response to a business cycle downturn.

Rather than crowding out private investment they crowd it in by changing pessimistic expectations to more optimistic ones among investors and by injecting much needed aggregate demand to combat the downturn in the cycle.

What is extraordinary is that the fiscal conservatives are now located among liberals, social democrats and in the US centrist Democrats, while conservative Republicans appear at least in part to be Keynesians, even if only military Keynesians.

The next deep business cycle downturn will pose some serious challenges to the fiscally orthodox.