The Deficit Paradox

Jacob Assa and Marc Morgan

No unige:195744, Working Papers from University of Geneva, Paul Bairoch Institute of Economic History

Abstract: Paradoxes have long functioned as diagnostic devices in economic theory, revealing tensions between individual behaviour, aggregate outcomes, and the conceptual foundations of economic reasoning. Building on the paradox of thrift, this paper develops a distinct but related puzzle: the deficit paradox . The deficit paradox arises from a persistent fallacy of identification between fiat currency users and fiat currency issuers; whereby radically different monetary actors are treated as if they faced symmetric budget constraints. For households and firms, deficits (expenditure in excess of income) reduce net worth and are constrained by solvency, and desired net saving. When generalised, these constraints can generate demand contraction and financial instability. For a sovereign fiat currency issuer, by contrast, spending and income are operationally unrelated: public expenditure creates money, taxation destroys it, and the relevant constraints are political and real rather than financial. Interpreting public deficits through household budgeting analogies therefore produces conceptual contradiction rather than insight. The paper combines stock‑flow analysis with insights from the philosophy of language to show how fiscal discourse is shaped by misleading metaphors and grammatical forms that obscure the distinction between accounting identities and binding constraints. Extending the argument, it shows how the same conceptual error structures debates over fiscal sustainability, economic development, and global imbalances. The deficit paradox thus reframes disputes over public finance as problems of conceptual clarity, rather than fiscal irresponsibility.

Keywords: Deficit Paradox; Paradox of Thrift; Monetary-Production Economy; Liquidity Preference; Stock-Flow Consistency (search for similar items in EconPapers)
JEL-codes: B41 E12 E41 H62 (search for similar items in EconPapers)
Pages: 16
Date: 2026
New Economics Papers: this item is included in nep-pke
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