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The Deficit Is HELPING the Economy, Not Hurting It, David Levy Says

Fin - Daily Ticker - US

President Obama hits the campaign trail this week - with stops in San Francisco, Los Angeles and Reno. A major goal of the trip is pushing the deficit reduction plan he unveiled last week to counter Rep. Paul Ryan's plan that calls for $6 trillion in cuts.

"There is an incredible agreement in Washington, that I don't think has any precedence, that we should be dramatically reducing deficit spending," says economist David Levy, chairman of the Jerome Levy Forecast Center.

Politicians are right to deal with America's long-term finances and the funding of our massive entitlement programs, Levy says. On the flip side, politicians should be careful what they wish for. The problem with focusing too heavily on the deficit is that government spending is contributing heavily to the economic recovery, he argues in the accompanying interview. Profits in the corporate sector are a result of government intervention, not in spite of them, as some critics argue.

"Right now the wealth creation process is deeply depressed because we have over-capacity, to0 much on balance sheets, too much debt and we're still working through that process," says Levy. Therefore, at this juncture, politicians are at risk of triggering another massive recession if they cutting government support, pointing to Japan's lost decades as proof.

Furthermore, Levy says draconian spending cuts will harm America's competitiveness in the next decade. As Paul Krugman has been arguing, the country's future depends on investment not deficit reduction. "If it's an ongoing enterprise, which I think the United State is, we should be putting trillions of dollars over the next decade into infrastructure, into supporting education in a time of weakness," Levy tells Aaron Task.

Finally, Levy says history shows our current debt-to-GDP levels do not threaten our future. So far, the debt market agrees but as the 2008 crisis demonstrated the market can shift on a dime with catastrophic results.