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Budget deficit not nearly as scary as most people have it

February 5th, 2010 · 4 Comments

Necessary antidote to the scaremongering..

Fiscal Scare Tactics
By PAUL KRUGMAN

These days it’s hard to pick up a newspaper or turn on a news program without encountering stern warnings about the federal budget deficit. The deficit threatens economic recovery, we’re told; it puts American economic stability at risk; it will undermine our influence in the world. These claims generally aren’t stated as opinions, as views held by some analysts but disputed by others. Instead, they’re reported as if they were facts, plain and simple.

Yet they aren’t facts. Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates. The long-run budget outlook is problematic, but short-term deficits aren’t — and even the long-term outlook is much less frightening than the public is being led to believe.

So why the sudden ubiquity of deficit scare stories? It isn’t being driven by any actual news. It has been obvious for at least a year that the U.S. government would face an extended period of large deficits, and projections of those deficits haven’t changed much since last summer. Yet the drumbeat of dire fiscal warnings has grown vastly louder.

To me — and I’m not alone in this — the sudden outbreak of deficit hysteria brings back memories of the groupthink that took hold during the run-up to the Iraq war. Now, as then, dubious allegations, not backed by hard evidence, are being reported as if they have been established beyond a shadow of a doubt. Now, as then, much of the political and media establishments have bought into the notion that we must take drastic action quickly, even though there hasn’t been any new information to justify this sudden urgency. Now, as then, those who challenge the prevailing narrative, no matter how strong their case and no matter how solid their background, are being marginalized.

And fear-mongering on the deficit may end up doing as much harm as the fear-mongering on weapons of mass destruction.

Let’s talk for a moment about budget reality. Contrary to what you often hear, the large deficit the federal government is running right now isn’t the result of runaway spending growth. Instead, well more than half of the deficit was caused by the ongoing economic crisis, which has led to a plunge in tax receipts, required federal bailouts of financial institutions, and been met — appropriately — with temporary measures to stimulate growth and support employment.

The point is that running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do. If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs.

True, there is a longer-term budget problem. Even a full economic recovery wouldn’t balance the budget, and it probably wouldn’t even reduce the deficit to a permanently sustainable level. So once the economic crisis is past, the U.S. government will have to increase its revenue and control its costs. And in the long run there’s no way to make the budget math work unless something is done about health care costs.

But there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.

Why, then, all the hysteria? The answer is politics.

The main difference between last summer, when we were mostly (and appropriately) taking deficits in stride, and the current sense of panic is that deficit fear-mongering has become a key part of Republican political strategy, doing double duty: it damages President Obama’s image even as it cripples his policy agenda. And if the hypocrisy is breathtaking — politicians who voted for budget-busting tax cuts posing as apostles of fiscal rectitude, politicians demonizing attempts to rein in Medicare costs one day (death panels!), then denouncing excessive government spending the next — well, what else is new?

The trouble, however, is that it’s apparently hard for many people to tell the difference between cynical posturing and serious economic argument. And that is having tragic consequences.

For the fact is that thanks to deficit hysteria, Washington now has its priorities all wrong: all the talk is about how to shave a few billion dollars off government spending, while there’s hardly any willingness to tackle mass unemployment. Policy is headed in the wrong direction — and millions of Americans will pay the price.

Tags: Economy · Opinion · Public Policy

4 responses so far ↓

  • 1 rod // Feb 6, 2010 at 8:51 pm

    Amazing. The writer of this article must have
    a government job, or his parents or relatives do.
    Most government employees don’t have a clue
    where their money comes from, all they know is
    that everything is lovely, and they are special and deserving. After all they are SERVING the
    people. Lets look at the facts:
    1. Trade and production: Recent data from the
    port of LA & Long Beach show that the primary
    exports from America are: Cow hides & Scrap Metal, while we import finished goods. Thus
    in order to keep buying those imported goods, we will have keep barrowing into oblivion.
    2. 3rd World Economy: Gandhi from India once
    said, India is a poor 3rd world country because
    it exports raw materials, and imports finished goods. We have to stop this, if we want to prosper. So, America has become a 3rd world
    country, unable to pay it’s bills no matter how high they go. So, why worry, just keep collecting that government check.
    3. The Chavez Method soon to come to America: Chavez ( a good Marxist-Socualist )
    recently cut the Venezulian currency by 1/2.
    That method will soon becoming here. The people were out-raged, because stores had to
    charge twice as much for their goods. So, like a
    good socialist, Chavez nationalized the clothing
    stores, and is constructing Government Food
    stores to keep prices down.
    Like all socialist, progressive ideas, they always
    end up the same way: bare shelves, utter poverty, and revolution. I think the world has
    already done this experiement.

  • 2 admin // Feb 7, 2010 at 1:03 am

    Not so amazing. The writer of the above comment seems to have no training whatsoever in economics..
    Krugman happens to have a Nobel prize and is no socialist. He doesn’t share the blind belief that markets can function in a regulatory vacuum or completely without government though, and guess what. There is a wealth of economic literature to back that up.

  • 3 admin // Feb 7, 2010 at 10:37 pm

    http://www.nytimes.com/2010/02/07/opinion/07sun1.html?em

  • 4 admin // Feb 8, 2010 at 2:48 am

    Even the IMF, that paragon of the conservative free-market ‘Washington consensus’ argued for a second stimulus last year:
    http://moneynews.com/Economy/imf-second-stimulus/2009/08/03/id/332059