We are seeing daily reminders of the real horrors of a jobless “recovery,” made worse by the expiration of unemployment benefits and stimulus COBRA subsidies. And we’ve seen confirmations that the stimulus bill’s deficit spending significantly helped to lessen the problem. Yet our media continue to pay too much attention to the perils of deficit spending, running alarmist (front-page) articles and editorials on the need for deficit reduction.

The economists who got it right – Krugman, Dean Baker, DeLong, et al — and others who learned the lessons (Zandi, Bartlett) have been desperately trying to keep the White House from repeating Herbert Hoovers’s mistakes in the early ‘30s and FDR’s “reduce the deficit” mistake in 1936-37. They’ve urging Congress and the White House to embark on further stimulus/job creation efforts financed primarily through deficit spending.

Since the White House will sponsor a “Jobs Summit” on Thursday, and at least Krugman and Stiglitz are reportedly invited, it may be helpful to have a relatively accessible statement of the basic argument for such efforts.

At a recent conference, Professor James Galbraith discussed the origins of the financial crisis and the remedies for getting us out of the resulting deep recession. Mark Thoma kindly posted three videos of Galbraith’s remarks at his blog, Economist’s View; the transcript below is an excerpt from the second video.

Summarizing the actions of the Federal Reserve to rescue the financial system from the catastrophe the bankers created while the Fed slept, Galbraith concluded:

You take all of this together, the vast expansion of the balance sheet of the Federal Reserve, and what you have, frankly, is the effective nationalization of the financial system. That’s what happened.

It was effective in every sense . . . except it did not effectively clean out the frauds, it did not effectively punish the predators, it did not effectively reform the system or exercise control over the conduct of the banks going forward. So you might say. it was the banks that nationalized the government, and not the other way around.

He continues with his view of the collapse of credit, dismissing the Fed’s view of credit as a “flow”:

Credit is a contract; credit is a reciprocal relationship between a borrower and a lender. And what happened a year ago is that the borrows, for reasons good and sufficient, quit; they stopped buying cars; they sat on whatever cash they had, they started protecting themselves as best they could in a situation which was deeply unsettling and deeply threatening.

They realized that a very good substitute for the car and the refrigerator that you might wants is the one you already have.

It’s going to be very interesting as this continues, because the society will get poorer over time as all of our stuff gets old. That’s how it’s going to work out.

So what saved the economy from further collapse?

Why didn’t we get . . . move directly into the Great Depression? The answer is, government. The fall of private spending was offset and in large part automatically by an increase in government spending.

. . .

What saved us therefore were institutions that were created in the Great Depression, in the New Deal, by Roosevelt: unemployment insurance and social security and disability forms of relief, and in the Great Society by Lyndon Johnson, particularly Medicare.

That’s the main reason the deficit shot up. The stimulus package added to that and is adding to that particularly now, six months after it was enacted. It was, I think, too small, weakened by political compromise, but it was still a constructive step. You add those two things together, you get the deficit, and the deficit is indeed the one thing which has prevented a catastrophic decline, so far, in economic activity.

I stress this, because it’s very important to recognize that all of this talk about how bad deficits are, is aimed at persuading people to accept a cutback of the only medicine which is keeping the system alive at the present time. It’s very important to recognize this.

The language is stacked against us: “deficits are bad, surpluses are good.” But in fact, the deficit is the antibiotic, and if you cut out the antibiotic before the patient is ready to recover from the disease, the infection simply comes back.

These seem like simple concepts, but they can’t be explained often enough when the Republicans are in denial and too much of the media either don’t get it or just repeat the denials. And it’s helpful to have them explained this clearly.


Krugman, The Jobs Imperative, Things to come, The Dogbert theory of debt, A familiar feeling, and many others.

Brad DeLong, Deficit neutral stimulus, Yes the ARRA is working, and CBO Fiscal Policy Multipliers,

Dean Baker, Let’s spend money, and generally here.

Mark Thoma, Worries About Budget Deficits and Inflation: Let’s avoid repeating our mistakes



John has been writing for Firedoglake since 2006 or so, on whatever interests him. He has a law degree, worked as legal counsel and energy policy adviser for a state energy agency for 20 years and then as a consultant on electricity systems and markets. He's now retired, living in Massachusetts.

You can follow John on twitter: @JohnChandley