February 15, 2005
NON-ISSUE:
Do Deficits Matter?: It depends on where you sit--and on which type of deficit you're talking about. (Irwin M. Stelzer, 02/15/2005, Weekly Standard)
WHEN DICK CHENEY SAID, "Deficits don't matter," economists took that as proof of the economic illiteracy of the Bush administration. But it turns out there is a case to be made that Cheney was onto something.On the deepest level, the vice president was echoing, in slightly exaggerated form, an idea put forward a few years ago by Irving Kristol, the Godfather of the neoconservatives who have had such a wide-ranging effect on Bush administration policy. Kristol wrote then, and still believes, that "We should figure out what we want before we calculate what we can afford, not the reverse."
On the political level, treating deficits as a non-issue also proved a successful strategy. After all, despite the torrent of red ink that splashed across the national budgets during his first term, George W. Bush was reelected by a substantial margin. Among John Kerry's other failures was his attempt to saddle the president with the label "profligate."
Which brings us to the economic level. The deficits that Bush ran up in the years in which the country was teetering on the verge of a serious recession had the beneficial effect of righting the economy. In that sense, deficits not only didn't matter, but were a force for economic good.
But that was then, and this is now. The economy, growing at an annual rate of 3.5 percent to 4.0 percent, is hardly in need of further fiscal stimulus.
The only coherent argument the valetudinarians ever offer for a balanced federal budget is that if the government borrows too much money it will crowd out the rest of us and raise borrowing costs. But money remains cheap here and in Japan, which has a debt far larger than ours, it's even cheaper.
Posted by Orrin Judd at February 15, 2005 6:39 PM
The crowding-out argument overlooks the small problem that offering tax increases on the altar of budget balance crowds out other things, like citizen deisions on spending and investing. That is why Milton Friedman famously said he would, if forced to choose, prefer a smaller government running chronic deficits than a larger one operating in balance. So long as central bankers decline to monetize the deficit and court inflation, increasing debt-service obligations might even -- barring zippy GDP growth -- eventually crowd out politicians' lust to buy more votes with new spending programs.
Posted by: Axel Kassel at February 15, 2005 7:42 PMJeff:
What about it? It's even defaulting on debt without any ill effects.
Posted by: oj at February 15, 2005 8:15 PMcountries to turn to where they can sell their low-cost products, reasonably small deficits in relationship to the GNP don't matter. Foreign countires can have trade surpluses and hold oodles of U.S. Treasury notes, but any attempt to call them in for some reason to teach the U.S. a lesson and choke off the American economy would also choke off foreign sales to the United States, thereby souring their own economies as well. Kill Wal-Mart and a lot of factories in Asia go dark as well.
Someday, China and or India may be wealthy enough to offer up alternative markets to the U.S., but the former still is in need of major political reform, and the latter still has a lot of class issues to deal with. That doesn't mean the U.S. can spend like a drunken sailor year in and year out, but it also means it's in everyone's best interest to keep the American consumer market as healthy as possible.
Posted by: John at February 15, 2005 9:27 PMOJ:
Are you kidding? Argentina used to be the fifth largest economy in the world.
Until profiligacy left them as an economic basket case, from which they are only now recovering.
Sounds like ill effects to me.
Posted by: Jeff Guinn at February 15, 2005 9:42 PMCheney was explicitly making a political point: that Ronald Reagan had proved that running deficits doesn't necessarily have a political cost. But the point also works economically. Reagan's mid-80s deficits were, as a percentage of GDP, about twice as large as our current deficits. Deficits of our current size have, more or less, no effect on the economy as a whole. While there is a theoretical small upward pressure on interest rates, in reality that pressure is always swamped by whatever else is going on in the economy.
Posted by: David Cohen at February 15, 2005 10:17 PMOh, and when the projected deficit is less than the projected annual growth rate in GDP, then (a) the actual deficit is likely to be smaller than projected and (b) there isn't even a theoretical upward pressure on interest rates.
Posted by: David Cohen at February 15, 2005 10:19 PMDavid:
And, the Fed hiked rates when the budget went into surplus.
Posted by: oj at February 16, 2005 7:09 AMJeff:
Argentina had other factors, which do not apply here in the US - much more powerful unions (especially govt. ones), a vaporous rule of law, an oligarchical tradition, and corruption that affected every level of governance. Plus, their banking and securities sphere was (and is) nothing like ours.
Japan shows us what happens when banks cannot fail. Argentina shows us what happens when everything fails at once. Neither is likely to happen here, at least not without warning.
Posted by: jim hamlen at February 16, 2005 10:47 AM