Tag Archives: interest

Annual Federal Budget Deficit v. Jobs

Are people really this Keynesian? A New York Times/CBS News poll (Apr 21, 2011) asked the following question (among others):

What effect do you think a major reduction in the annual federal budget deficit would have on the number of jobs in the U.S.?

The results are not surprising, given some major problems with the question.

  • Create Jobs – 29%
  • No opinion – 15%
  • No effect – 27%
  • Cost jobs – 29%

The question’s greatest flaw is that it omits time scale, and in so doing, predisposes the respondent to assume the near-term, immediate, or first effects. (Now that’s thinking politically!)

If we borrow from the future to pay for jobs today, debt isn’t the only item that increases. Money supply increases in the short term, and so do prices if the economy does not grow commensurately. Contrary-wise, while the first effect of an immediate decline in government spending may be some lost jobs, the second effect would be a fall in money supply and almost certainly prices. The third effect would be falling wage rates (with greater purchasing power), followed by expanded employment.

Had the question asked what effect respondents thought major reductions in annual federal budget deficits would have on long-term stability of the job market, the answers would have been very different.

Further Reading:

Wikipedia: Irving Fisher (and his seminal work, Appreciation and Interest)

However Fisher believed that investors and savers—people in general—were afflicted in varying degrees by “money illusion”; they could not see past the money to the goods the money could buy.

Random study: NBER: Time Preference and Health: An Exploratory Study (PDF) Jul 1982

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