May 3, 2002

CHAIT VS. REALITY :

Red Handed : THE DEFICIT GETS WORSE, AND SO DOES BUSH (Jonathan Chait, http://www.thenewrepublic.com/doc.mhtml?i=20020513&s=chait051302, New Republic)
The latest in what has become a steady stream of bad budgetary news arrived last Friday, when newspapers reported that this year's deficit is estimated to be about $100 billion--twice as large as previous forecasts had suggested.

[D]oes a little red ink really do any harm? Yes, it does. We have only one decade left until the baby-boomers begin retiring. Paying off the debt before then would spare future taxpayers having to pay interest costs--which currently soak up almost $200 billion per year--and thus make it easier for them to bear the burden of more expensive medical and retirement costs.

Reducing government debt also frees up capital for private investment, lowering long-term interest rates and promoting growth. Conservatives, seeking to justify the red ink produced by Bush's tax cut, try to deny the connection between deficits and long-term interest rates. "We have very little empirical evidence to suggest much of a link between deficits and interest rates," claimed White House economist Glenn Hubbard earlier this year. But Bush himself has endorsed the link when it suits him. "I'm mindful
of what overspending can mean to interest rates or expectations of interest rates," he said last week. The game here is obvious--and obviously dishonest. The administration stresses the harmful effects of deficits when discussing spending but downplays those exact same effects when the topic is taxes. (As a result, what Bushies actually believe about deficits and interest rates remains anybody's guess.)


I'm not an economist and would welcome correction on this point, but, having just lived through the 70s, 80s, 90s and the start of the '00s, Mr. Chait's argument here, though perched on classical economic theory, seems to have proven quite wrong in practice. The 80s, during which Ronald Reagan famously exacerbated the budget deficit, were a time of falling interest rates. The 90s, during which we reaped the benefit of the Peace Dividend, saw the budget balance and interest rates rise. The early '00s have seen a return to deficit and a fall in interest rates. If anything, you could argue that because interest rates are set by humans trying to manage the economy, deficits have a beneficial effect on interest rates, forcing the Fed to hold them down. And when the retirement of the Boomers completely bankrupts the economy is there any way that the Fed will be able to raise rates or won't they be more likely to go to 0% in a desperate attempt to avert Depression? Posted by Orrin Judd at May 3, 2002 7:14 AM
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