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The only thing worse than liberal economists....

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06/27/2004

...seems to be pro-Bush economists. Supply-side economists like Larry Kudlow have for long been even worse than liberal economists like Paul Krugman on issues like budget deficits and inflation. But this article from Thomas Nugent is among the nuttier I have read. He actually claims that budget deficits are good and should be as large as possible because it allegedly increases "aggregate demand" and even savings. But what about the rise in the federal debt? No need to worry, because the government has the power to inflate "it [Government] can't run out of money because it creates it"

The fallacy of this is of course that deficits do not increase "aggregate demand" but merely diverts savings into government consumption rather than investments. And far from increasing savings, deficits will reduce savings as it diverts saved funds from investments to government consumption. It is like saying you increase savings if you lend money to some guy who will spend the money on booze instead of using it yourself to buy for example a new computer. This too might increase your "financial savings", but real savings will of course be lower. And using inflation to pay for government spending will also decrease savings as it creates a disincentive for savings.

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