Deficits? Yawn.09 Feb 2004
Just yesterday I was ranting to Amanda about the state of political discourse in this country. My theory is not exactly a revelation, but what I have noticed is that key words and phrases in our political lexicon that represent very, very serious things no longer have any impact on your average American. Take the word “deficit”. We’ve lived with the spectre of looming deficits hanging over our head for decades now, and the word is losing its impact. After all, we’re fine now, aren’t we? So these deficits must work themselves out, right? Wrong.
And, like clockwork, I see Say Uncle quoting from an article in the NYT this morning:
Deficits are evil! Or maybe not:
So what is the reaction from the bond market vigilantes, those disciplinarians who bid up interest rates whenever past deficits started looming? Yawn.
The bond market, it seems, has stopped worrying and learned to love the deficit. The question, of course, is whether everybody else can relax, too.
“Under Reagan in the 80’s, I remember headlines day after day saying we were leveraging our children’s future,” said Lundy R. Wright, a managing director and top bond trader at Morgan Stanley. “But in good times, we got back to surpluses. I think the lesson is, you can borrow when times aren’t so good and cyclical factors will help get you out of it.”
I’ve said similar things before.
I couldn’t have asked for a better example. Deficits seem to be no big deal, then, right?
First let me say that SayUncle is grossly misrepresenting this article, or maybe he didn’t read the whole thing. The NYT article continues:
THE absence of concern is all the more alarming now, given the enormous shortfalls in Social Security and Medicare that await in coming decades, economists say. “If the 80’s deficit had gone away on its own, that would be one thing,” said Benjamin M. Friedman, a Harvard economics professor.
He noted that the long economic expansion of the 1980’s did not bring down the national debt. Only after the first President Bush raised taxes, President Clinton raised them further and the Republican Congress of the mid-90’s reduced spending growth did the deficit vanish. “And the people who took those tough actions didn’t necessarily get rewarded for them,” Mr. Friedman said.
And then, the closing line:
Stan Jonas, managing director at Fimat USA, a New York brokerage firm, added: “There’s a lot of talk that the deficit is going to balloon in 2020. O.K., I agree.”
But, he said, “any bet I make about what’s going to happen to the deficit in 20 years, I’m not going to be around to collect.”
On top of that, the vigilantes may have personal reasons for viewing today’s deficits differently from yesterday’s.
“The bond vigilantes are getting older,” Mr. Jonas said. “They’re the ones who benefit from the deficit. It’s their kids’ problem.”
Deficits don’t just magically go away. Like all shortfalls, they must be paid off with sacrifice. The deficits of the 1980s did not just magically go away. The country was faced with a choice: decrease spending or increase taxes. So, increase taxes they did. George H.W. Bush, first, which cost him the White House, and later Clinton, aided by a late-90s boom in the economy.
Today, with projected deficits that make the 1980s look like a walk in the park, we are faced with a similar choice. If the Republicans have their way, the deficits will be relieved at the expense of spending: namely, our social programs – social programs that most Americans, despite finding some cause for reform, still find extremely valuable, and more important than tax cuts. So, this is a choice that most Americans will likely never make, although, as I’ve noted before, the debate is rarely framed with such clarity. The representation of our spending cuts as unavoidable “belt-tightening” is just as dishonest as this representation of deficits as “no big deal”.
Further, the severe inflation of the bond market by foreign investment that Mankiw writes off as “confidence in the U.S. economy” is a significant cause for concern, as this foreign investment continues to prop up the dollar, and just barely at that. What happens when their confidence, already shaky, no doubt, gives way?
One thing is clear: deficits are not something to be taken lightly. Deficit spending by the government is acceptable and even beneficial when it’s spending that increases the productive capacity of the economy in such a way as to be recouped later in tax revenue. Nothing that George W Bush has done thus far (expensive, unnecessary war and tax cuts for the wealthy) will have such an effect. These deficits will make for some difficult choices ahead, which is just what the Republicans have in mind.
Mankiw says of the “bond vigilantes” that “people basically trust the U.S. to do the right thing.” I agree with him in this respect. Hopefully people will do the right thing: remove George W Bush from the White House and elect a Democrat that will enact a sensible federal budget and tax policy that will pull us from the precipice of economic ruin.