Wednesday, June 17, 2009

Deficits: another view...

Megan articulately outlines reasons why "deficit-blame" is a futile exercise.

I am a long-time believer in the notion that nobody cares about the budget deficit.  People say they care about the budget deficit, but people say they care about a lot of things.  Almost everything, in fact.  What people flogging the budget deficit actually care about is the programs it goes to pay for.  Every time the presidential party turns over, I get the pleasure of watching deficit-hawk Democrats suddenly discover that borrowing hundreds of billions of dollars actually has no moral or economic implications, especially when compared to national health care.  Meanwhile, Republican scientists who presumably spent the last eight years locked in a vault in the basement of Heritage run out into the metaphorical street screaming that they have just made a shocking, horrible, and totally unexpected new discovery:  budget deficits will make the economy melt down into a pool of manufacturing-depleted sludge, and also, cause rabies.

Economically, much of the talk about deficits is hysteria.  A budget deficit of less than 4% of GDP is not a good thing, but it rarely results in catastrophe either, because inflation and GDP growth steadily erode the value of past debt.  As long as the deficit is less than inflation + GDP growth, the government is unlikely to get into much trouble.  It's possible that this borrowing may crowd out private borrowing, but at least over the last decade, this has obviously not been the case.  [More]

Her point is taken, but she slides gently over cumulative effects, methinks. She also somehow misses the clear political tactic now embraced fully across the right of harsh criticism of the Bush fiscal performance. For example, the Bush tax cuts expire on Obama's watch, and does anyone doubt that those deficit contributions will be framed as tax increases by the GOP when (and if) he lets them expire?  A deficit of manageable proportions is no big worry, I agree, but arranging for so much to fall outside your own term has now become standard practice. 

This is how we get the CBO to score legislative spending much cheaper than it actually will be, since the length of the analysis and back-loading of costs doesn't show the true effect on the budget.

Regardless, she does clearly point out that the deficits we are facing exceed the "not-to-worry" category, regardless of the author.  So setting aside paternity testing every deficit dollar, the growing uneasiness is how will we (and the rest of the developed world) staunch the beleeding of red ink?

Not since the second world war have so many governments borrowed so much so quickly or, collectively, been so heavily in hock. And today’s debt surge, unlike the wartime one, will not be temporary. Even after the recession ends few rich countries will be running budgets tight enough to stop their debt from rising further. Worse, today’s borrowing binge is taking place just before a slow-motion budget-bust caused by the pension and health-care costs of a greying population. By 2050 a third of the rich world’s population will be over 60. The demographic bill is likely to be ten times bigger than the fiscal cost of the financial crisis.
Will they default, inflate or manage their way out?

This alarming trajectory puts policymakers in an increasingly tricky bind. In the short term government borrowing is an essential antidote to the slump. Without bank bail-outs the financial crash would have been even more of a catastrophe. Without stimulus the global recession would be deeper and longer—and it is a prolonged downturn that does the greatest damage to public finances. But in the long run today’s fiscal laxity is unsustainable. Governments’ thirst for funds will eventually crowd out private investment and reduce economic growth. More alarming, the scale of the coming indebtedness might ultimately induce governments to default or to cut the real cost of their debt through high inflation. [More]

One approach by the author above is binding budget enforcement measures that limit future debt when the economy is recovering. Pay-as-you-go is one such idea.  Also recall the choking effects of Graham-Rudman some years ago.  It should be noted that any law Congress passes, Congress can wriggle around.

Most heartening to me, is that we are having this discussion at all. Considering that  only a few months ago, deficits were way down the list as the idea of global depression seemed nearly inevitable. To the extent that general confidence is important to the working of our economic system (and it appears to be crucial), this is surprisingly good news.

Deficit-carping beats depression-mongering in my book.

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