Deficits Rule!

Yesterday, I watched a woman in TV criticizing in no small words the fact that the Germans established in their Constitution specific rules for budget deficit controls, and France and Germany’s suggestion that other countries should do the same. This kind of criticism baffles me. I know many countries seem to be happy running 2% or 3% budget deficits (Portugal will be happy with 5.9% this year). But if we see it through the point of view of coherence and sustainability, there is only one acceptable level of budget deficit: 0%.

Deficits are not wrong by nature, just as credit cards are not wrong by nature. But when you start believing that your credit card is a source of income, something is definitely wrong. Deficits are ok if they are an exception. But no system can be sustainable if it depends on running deficits for years, decades or even centuries. No family could live like this and no company would dream of functioning like this, except if it was being subsidized.

Why shouldn’t countries have debt ceilings and deficit controls in their fundamental rules? I think it is a perfectly reasonable idea. As much as calling for regulations in the banking and financial systems. I would go even further: there should be goals of achieving 0% deficit levels (didn’t Bill Clinton achieve this in the US just a few years ago?). Not all the time (let’s give room to exceptional times), but at least most of the time. Because, as Milton Friedman would say: it’s very easy to spend other people’s money in other people’s name.

Would this impair growth? I think growth is better served by a healthy system. Growth by growth’s sake is a fool’s errand. We should try to be healthy. Health will bring growth.

Of course, there’s a whole other debate we could have about the flip-flapping of France and Germany’s positions on this subject (which lead us to believe there’s not an ounce of coherent thinking in both countries’ Governments at the moment), but that doesn’t mean the idea is not a good one.