Dean Baker: Economics 101 for the Debt Fixers

Friday, 30 November 2012 06:33

Many economists have pointed out that the Campaign to Fix the Debt and the rest of the austerity crew seem badly confused about basic economics. The most obvious item that they seem to be missing is that large current deficits are the result of the downturn that was caused by the collapse of the housing bubble.

We did not go on a sudden spending spree and tax cutting orgy in 2008. The deficits exploded from a completely sustainable 1.2 percent of GDP in 2007 to levels close to 10 percent of GDP in 2009 and 2010 because the downturn sent tax collections plummeting and increased spending on programs like unemployment insurance. Were it not for the downturn, the deficits would again be relatively small. Rather than posing a risk to the economy, the deficits are sustaining demand and growth, keeping unemployment lower than it would otherwise be.