Budget deficits are only too large if they usurp the private economy’s need for physical capital and labor, thereby precipitating an inflationary surge.
So, as long as there is are any unused resources in the economy, the government should increase spending?
...tax payments simply reduce account balances in the private sector. Nothing “goes” anywhere; the government doesn’t “get anything.” To reinforce this point, if you pay your taxes in actual cash, or buy Treasury securities (government bonds) with actual cash, the Fed shreds the cash. Likewise, if you donate cash to the federal government for Katrina, it shreds it. In fact, if you take a $100 bill and burn it, you’ve donated that $100 to Katrina!
I'm sorry, but I've read the preceding paragraph several times, and it makes less sense each time. Same with the following:
Will private borrowers be crowded out [by increased government deficits]? Impossible. The causation is “loans create deposits,” as taught on day one of every traditional money and banking class. The act of borrowing itself creates exactly that same amount of new liabilities (deposits). The process is “self funding” and circular, as a matter of accounting. The concept of a “pool of savings” that somehow gets “used up” by borrowers is a throwback to the time of fixed exchange rates and gold standards, and has no application in today’s floating-exchange-rate world.
When I was in grad school, I somehow missed the lecture where they said that government deficits are self-funding in a flexible exchange-rate regime.