Fiscal hawks are fond of declaring that deficits are always bad. Not so, replies the strategic investment analyst H Wood Brock in an interesting new book, The American Gridlock.
A proper assessment, Brock argues, depends on the "composition and quality of total government spending".
Government deficits incurred on current spending for services or transfers are bad because they produce no revenue and add to the national debt. Deficits resulting from capital spending, by contrast, are - or can be - good.
If wisely administered, such spending produces a revenue stream that services and eventually extinguishes the debt; more importantly, it raises productivity, and thus improves a country's long-run growth potential.
From this distinction follows an important fiscal rule: governments' current spending should normally be balanced by taxation. To this extent, efforts nowadays to reduce deficits on current spending are justified, but only if they are fully replaced by capital-spending programmes. Reducing current spending and increasing capital spending should be carried out side by side.
Brock's argument is that, given the state of its economy, the US cannot return to full employment on the basis of current policy. The recovery is too feeble, and the country needs to invest an additional US$1 trillion (Dh3.67tn) annually for 10 years on transport facilities and education. The government should establish a National Infrastructure Bank to provide the finance by borrowing directly, attracting private-sector funds, or a mixture of the two.
The distinction between capital and current spending is old hat to any student of public finance. But we forget knowledge at such an alarming rate that it is worth restating it, particularly with deficit hawks in power in the UK and Europe, although fortunately not (yet) in the US.
According to proposals agreed to at an informal European Council meeting on January 30, all EU members are to amend their constitutions to introduce a balanced-budget rule that caps annual structural deficits at 0.5 per cent of GDP.
This ceiling can be raised only in a deep depression or other exceptional circumstances, allowing for counter-cyclical policy so long as it is agreed that the additional deficit is cyclical, rather than structural. Otherwise, violations would automatically trigger fines of up to 0.1 per cent of GDP.
The UK is one of two EU countries (alongside the Czech Republic) that refused to sign this "fiscal compact", acceptance of which is required to gain access to European bailout funds. But Britain's government has the identical aim of reducing its current deficit of 10 per cent of GDP to near zero in five years.
An argument commonly heard in support of such policies is that the "bond vigilantes" will demand nothing less. And the finances of some European governments (and Latin American governments in the recent past) have been so parlous this reaction is understandable.
But that is not true of the US or the UK, which both have large fiscal deficits. And most countries were adhering to reasonably tight fiscal discipline before the crisis of 2008 undermined their banks, cut tax revenues, and forced up debt.
At the same time, we should not attribute current enthusiasm for fiscal retrenchment to such contingencies. At its heart lies the belief that all government spending above a necessary minimum is wasteful. Europe has its own Tea Party crackpots who loathe the welfare state and want it abolished or radically pared, and who are convinced that all capital spending is just so many roads, bridges, and railway lines to nowhere that soak up their money.
Those who believe this are unfazed by the corruption and waste that characterises much private-sector spending. And they prefer the total waste of letting millions of people sit idle to the possibly partial waste of programmes that put them to work, nurture their skills, and equip the country with assets.
One can criticise details of Brock's case: a deeper understanding of the 20th century British economist John Keynes would have given him a more persuasive response to the objection that, if state-financed projects were worth doing, the private sector would be doing them. Before long, we will have to provide answers to these questions.
Robert Skidelsky, a member of the British House of Lords, is professor emeritus of political economy at Warwick University
* Project Syndicate