Deficit Paranoia and Unemployment: A Critical Perspective

The purpose of the paper is to provide a conceptual perspective on the potential merits of deficits as well as to assess the relevance of the NAIRU concept, by touching on the fundamental arguments for and against public deficits. In periods of economic austerity, structural deficits can have stimulating effects on economic growth. Policy makers should pursue a high-employment deficit target such that the debt-to-GDP ratio remains constant. The NAIRU is a rather antiquated notion that has to be carefully reconsidered. The existing mechanism reflected by the dominant neoliberal doctrine has put paid to any adjustment efforts to consolidate the economies; hence, adding further to the problem by transferring the entire burden of adjustment to labor markets. Instead of striving to eliminate deficit regardless of the shape of the economy, we should try and pursue a deficit that is sufficiently large to provide the effective demand for all of the goods and services the economy can generate. The effects of cumulative causation can lead to a chain reaction capable of putting the economy on the road to recovery.