Why reducing the Deficit is WRONG (and when it will be Right)

Any method of reducing the deficit is contractionary. It has the effect of lessening economic growth. Some ways of reducing the deficit are more or less contractionary, but they are all contractionary.

Cutting the deficit is similar, in effect, to the Fed increasing interest rates.

Stimulus borrowing is similar, in effect, to the Fed cutting interest rates.

The Fed would like to stimulate the economy by cutting interest rates, but since we have been stuck at zero for years the rates cannot be cut further. (That is why we have had to rely so heavily on deficit spending for stimulus. And that need has not gone away.)

Cutting the deficit today is truly counterproductive because we would be trying to stimulate the economy with one hand while contracting it with the other hand. An incoherent policy.

The time to cut the deficit is when the Fed would normally be raising interest rates to cool off the economy.

In that case, the Fed says, "The economy is over-heating so we need to contract it with higher rates." And the federal government says, "We need to reduce the deficit anyway, so we can do some of the cooling off on the fiscal side."

Cutting the deficit while the Fed is trying to stimulate the economy is dumb. It's like stomping on the gas and the brake at the same time.