- Question
Do deficits matter?
For decades, politicians and economists have condemned deficits as evil. Today, there is a lively debate about whether deficits matter and whether there are advantages to running them. Most notably Modern Monetary Theory encourages the government to run deficits in order to achieve its objectives of full employment and investment.
Structurally high deficits are bad
High deficits that are due to structural (as opposed to temporary cyclical deficits) are bad. They lead to higher inflation and the crowding out of private investment.
Deficits are not bad as governments that issue their currency can't go bust
The government should use fiscal policy to achieve full employment, creating new money to fund government purchase. Deficits are not a problem, only inflation is. If inflation becomes a problem, the government can raise taxes and issue bonds to withdraw cash from the economy.
Moderate deficits are good, very high deficits lead to problems
Rather than a binary disagreement that deficits are good or bad, it is reasonable to conclude that small deficits are irrelevant to the broad economy, and only high deficits financed by central bank accommodation create inflation