In other words, fear of a recession will cause tremendous monetary easing, which in turn will lead to inflation? It is, unfortunately, a very Republican idea, but I think it is right. Whether you like it or not, the financial
markets are in conservative hands. People who lend money to the government and business will not buy monetary
easing as a solution to a recession.
Are you implying that the deficit problem is just a time bomb, which will eventually shatter the economy? Sure. We tend to think that since it is not a problem now, that means it won't be. We expect continuity in our
lives, but the economy, and certainly the markets, are more discontinuous than continuous.
And you are saying that people look at the deficit year after year and think, "Well, it can't be so bad, the economy is strong," and one day everybody wakes up— It is like having termites in the foundation of your house. You may not notice them until one day they gnaw
away a big chunk and the house collapses. I don't think anybody should take a large amount of comfort in the fact
that things appear to be holding together.
Hypothetically, if you were President and could influence change, would the deficit be the first thing you would change? Sure. I think it is especially important for Democrats, since they were the first ones to pick up the banner of
Keynesianism [the advocacy of government programs to increase employment], to admit that while it may be a great
theory, it doesn't work in the real world.
I don't think Keynes ever proposed using deficit spending in strong economic times. No, that's true. He proposed surpluses that were supposed to be countercyclical to deficits. Surpluses in good
times; deficits in bad times. The trouble is that we have only one side of that equation because of the lack of political
will to create the surpluses when times are good. So what we really ought to do is admit that Keynesian economics is
just an excuse for easy money, overspending, and overconsuming. We ought to just admit that the government is a
debt junkie and the whole concept of deficit spending is flawed in practice.
