Levy: We Need Deficit Spending to Keep Economy Afloat

Growing deficits and shaky debt at home and abroad have become daily headlines, causing consternation among governments, businesses and the investing public.

In recent days, in a grim communication from our very own shores, the Treasury Department projected that the U.S. deficit will reach $19.6 trillion by 2015 and hit $13.6 trillion this year. Ugly indeed.

Or is it? According to David Levy of The Jerome Levy Forecasting Center, what's actually needed is a more measured approach. In times of crisis, deficits are not conditions to be feared, problems to be solved or diseases to be cured. Quite the opposite: They're exactly what's required to keep the house from falling down.

"Sometimes it's a very good thing," he tells Aaron in the accompanying clip. "It is a far, far better consequence to have a very large deficit run up for even a decade if it takes that than to have the kind of collapse that we had with the Great Depression."

If we in the modern economy have learned anything, it's that the U.S. government can keep spending. While that leads to varying degrees of angst, rage and panic among many market and public policy commentators, the world's largest economy is in a place and at a time that calls for it, Levy believes.

But can the U.S. keep spending? Shouldn't Washington be trying to follow the European model of austerity? No, Levy contends, saying that any effort to markedly slash the deficit is sure to backfire.

"They're taking the Hooveristic, Euro-masochistic type of approach," he says. "The problem is this -- people are confused. They see the huge deficits, they don't see the response, and they're worried. They don't know where it's ending."

Deficits, he explains, can be caused by many things. The dominant influences on deficits here, in Europe and in Japan, are the problems in the economy. Balance sheets got too big in the private sector, debt became too high to be serviced and asset values rose too far to justify. For some time, low rates sustained the situation, but now we're effectively at zero.

"We're going through a period of enormous weakness in business investment, household investment … and state and local investment," he says. "What we should do is do much more long-term federal investment. Infrastructure repair, education [and] rebuild military hardware."

Levy isn't particularly optimistic about the economy in the near term, but his views on the longer-term picture are brighter. "We're in a period we call a contained depression," he says. "We will get through this, it will take maybe a couple of business cycles, but at that point we'll have something I think that looks more like the post-World War II period."

Many Tech Ticker guests who appear for segments and are bearish are negative because of the deficit. To the members of that camp, the better approach would be to take the pain now rather than delay it. Levy isn't among them.

He says private balance sheets are contracting, and that even with the increase in government debt, total debt in the U.S. economy is shrinking. If the government wasn't expanding debt, "we would have an even faster collapse."

So here's to enjoying your deficits while they last.