Why we are Wrong about Deficits and Debt

Mar 16, 2013


- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Over the last two years, as the global economy continues its struggles, the debate we are witnessing over economic policy is centered heavily on government deficits and debt. For example, the recent Indian budget was criticized for not cutting the deficit enough.

It we look at economic policy in Europe or the USA, the entire debate among politicians is on the deficit and the debt. The primary goal is how to we reduce the deficit and reduce our debt levels. It is as if, we are focusing only the deficit as the measure of economic prosperity. High deficits mean we'll have a crisis, and no deficit is the best possible economic outcome.

This type of thinking is completely flawed. Deficit and debt levels are not a good measure of economic prosperity. If you look at deficit levels across countries, there are plenty of poor countries with surpluses and rich countries with deficits. The idea that reducing the deficit will lead to economic prosperity is plain wrong.

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The measures that are most related to economic prosperity include GDP per capita, GDP growth, unemployment, investment, and inflation. When forming an economic policy, our end goal needs to focus on increasing income, increasing investment and increasing employment.

It is certainly the case that high debt levels can lead to major problems. When debt becomes unsustainably high, it can result in a crisis. So we should certainly take steps to avoid a crisis situation. But this does not mean that we should make the end goal of our economic policy deficit reduction . Deficit reduction should be a byproduct of achieving higher income and employment.

Most politicians who advocate debt reduction as the cure for all economic problems have little explanation for how exactly income and employment will improve when government spending is cut. There is no link between the policy and economic prosperity.

We need to shift the terms of the debate. With every economic policy, we must answer the question as to how this will improve economic outcomes for country. And this means ending our obsessions with deficits and debt, and not over-prioritizing them.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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9 Responses to "Why we are Wrong about Deficits and Debt"

Kannan

Mar 19, 2013

Rightly told. Growth always coupled with deficit and debt.

Like 

Surendranath

Mar 19, 2013

"If you look at deficit levels across countries, there are plenty of poor countries with surpluses and rich countries with deficits."----

This is so because the surpluses of the Poor countries are used by the Rich countries to fund their deficits..Optimisation is the ideal..though looks like a dream..

Like 

Chandrasekaran

Mar 18, 2013

Let the Debt & Deficit Help to grow our country`s real standard of living , let it bring smile to all our common man , But not to fatten our politicians money BAGS.Most of the time, the hard earned common man`s money goes to cunning cheats pocket.

Like 

Amit Goyal

Mar 17, 2013

True... Deficit reduction is the goal but not by decorating the balance sheet. Rather it needs to be achieved by increasing income, employment and investment.

Like (1)

Balbir Singh

Mar 17, 2013

The budget has been presented keeping in view general election due in 2014. We must appreciate finance minister to cut the deficit to the extent possible. regds.

Like (1)

Narendra Vyas

Mar 17, 2013

Mr Dossani is right in saying just by controling deficit and reducing debt the country will prosper but not exactly the way country can improve per capita gdp growth and income by attracing foreign investments thru good policies at lower rate of interest us and japan having 2 % int rate while india having 12 to 15 % rate of int.so much mismatch. by increasing exports thru favourable export policy and reducing imports thru developing new technologies so you do not depend on imports, plus gandhian views on swadeshi will promote indian goods and services that will far exceed world expectations.Reducing Taxation in all fields to increase our ability to fight competition for exports and self compliance of taxation rules which will reduce comlications and legal fights and the unnecessary time waste in fighting legal battles on complicated issues.Bring new rules for housing sector. Realising new lands for housing sector, Bring back black money lying in swiss and other banks to india to generate more investment and growth for country. Bring Narendra Mody as Prime Minister to get faster pace of country's growth and such other steps can be taken to improve per capita GDP and Income of Indian Citizens.

Like (1)

V M Ketkar

Mar 17, 2013

I was surprised by the statement by Assad Dossani that deficit has no bearing on job creation and growth! We in India have seen too much laxity in controlling the debt in UPA's tenure. UPA made the mistake of spending on schemes involved in doling out help to poor persons which do not lead to increasing jobs at all. Hence the current Fin minister is concentrating on not increasing debt at all!

Like (1)

Kishan

Mar 17, 2013

I thought you understood economics better than us but here you seem to be misled by the recent US history which cannot be applicable to India.Think of the unbearably high inflation that is a result of runaway deficits.And think of the poor and fixed income groups and retirees who are the worst hit by inflation.Ask any aam aadmi and he will tell you that his worst fear is the prices doubling every 2/3 years.

Like (1)

SHAH RITA

Mar 17, 2013

AN EXCELLENT ANALYSIS LET OUR MINISTERS AND BEAUROCRET FIND TIME TO READ THIS INCLUDING MONTEK AHHUWALIA AND MR,RAJAN TOO

Like (1)
  
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