Deficits Do Matter

See also BondDad and taylormattd

Ezra Klein takes an interesting column from Paul Krugman on Demoracts and the Deficit and jumps to an entirely inccorrect conclusion about deficits, arguing like Kemp and Cheney, that deficits do not matter. that is simply wrong.

First, Krugman's point:

Now that the Democrats have regained some power, they have to decide what to do. One of the biggest questions is whether the party should return to Rubinomics — the doctrine, associated with former Treasury Secretary Robert Rubin, that placed a very high priority on reducing the budget deficit.

The answer, I believe, is no. Mr. Rubin was one of the ablest Treasury secretaries in American history. But it’s now clear that while Rubinomics made sense in terms of pure economics, it failed to take account of the ugly realities of contemporary American politics.

And the lesson of the last six years is that the Democrats shouldn’t spend political capital trying to bring the deficit down. They should refrain from actions that make the deficit worse. But given a choice between cutting the deficit and spending more on good things like health care reform, they should choose the spending.

In a saner political environment, the economic logic behind Rubinomics would have been compelling. Basic fiscal principles tell us that the government should run budget deficits only when it faces unusually high expenses, mainly during wartime. In other periods it should try to run a surplus, paying down its debt.

I get Krugman's point. To wit, when Democrats bring down the deficit and create surpluses the Republicans take all that hard work and then give away tax breaks to the extremely wealthy. And that is obviously what happened in the last 6 years.

But that does not mean deficits do not matter. More.

Deficits do matter, and maybe more than conventionally thought:

The U.S. federal budget is on an unsustainable path. In the absence of significant policy changes, federal government deficits are expected to total around $5 trillion over the next decade. Such deficits will cause U.S. government debt, relative to GDP, to rise significantly. Thereafter, as the baby boomers increasingly reach retirement age and claim Social Security and Medicare benefits, government deficits and debt are likely to grow even more sharply. The scale of the nation's projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur. Conventional analyses of sustained budget deficits demonstrate the negative effects of deficits on long-term economic growth. Under the conventional view, ongoing budget deficits decrease national saving, which reduces domestic investment and increases borrowing from abroad.1 Interest rates play a key role in how the economy adjusts. The reduction in national saving raises domestic interest rates, which dampens investment and attracts capital from abroad.2 The external borrowing that helps to finance the budget deficit is reflected in a larger current account deficit, creating a linkage between the budget deficit and the current account deficit. The reduction in domestic investment (which lowers productivity growth) and the increase in the current account deficit (which requires that more of the returns from the domestic capital stock accrue to foreigners) both reduce future national income, with the loss in income steadily growing over time. Under the conventional view, the costs imposed by sustained deficits tend to build gradually over time, rather than occurring suddenly.

And it can be even worse than that:

The unfavorable dynamic effects that could ensue are largely if not entirely excluded from the conventional analysis of budget deficits. This omission is understandable and appropriate in the context of deficits that are small and temporary; it is increasingly untenable, however, in an environment with deficits that are large and permanent. Substantial ongoing deficits may severely and adversely affect expectations and confidence, which in turn can generate a self-reinforcing negative cycle among the underlying fiscal deficit, financial markets, and the real economy:

* As traders, investors, and creditors become increasingly concerned that the government would resort to high inflation to reduce the real value of government debt or that a fiscal deadlock with unpredictable consequences would arise, investor confidence may be severely undermined;

* The fiscal and current account imbalances may also cause a loss of confidence among participants in foreign exchange markets and in international credit markets, as participants in those markets become alarmed not only by the ongoing budget deficits but also by related large current account deficits;

* The loss of investor and creditor confidence, both at home and abroad, may cause investors and creditors to reallocate funds away from dollar-based investments, causing a depreciation of the exchange rate, and to demand sharply higher interest rates on U.S. government debt;

* The increase of interest rates, depreciation of the exchange rate, and decline in confidence can reduce stock prices and household wealth, raise the costs of financing to business, and reduce private-sector domestic spending;

* The disruptions to financial markets may impede the intermediation between lenders and borrowers that is vital to modern economies, as long-maturity credit markets witness potentially substantial increases in interest rates and become relatively illiquid, and the reduction in asset prices adversely affects the balance sheets of banks and other financial intermediaries;

* The inability of the federal government to restore fiscal balance may directly reduce business and consumer confidence, as the view of the ongoing deficits as a symbol of the nation's inability to address its economic problems permeates society, and the reduction in confidence can discourage investment and real economic activity . . .

The point is that while Krugman seems right on the politics for the short term, it is an unsustainable policy approach. At some point, good economic policy will be required. A Democratic President in 2008 is essential for this of course.

Perhaps that will be the signal Krugman is waiting for to endorse a return to sane economic policies.

< Pot User May Be Freed After Serving 16 Years | Documentary: US Kept French From Taking Out bin Laden >
  • The Online Magazine with Liberal coverage of crime-related political and injustice news

  • Contribute To TalkLeft

  • Display: Sort:
    Just ask David Walker, Comptroller... (5.00 / 2) (#2)
    by Bill Arnett on Fri Dec 22, 2006 at 12:19:26 PM EST
    ...General of the U.S., where he says HERE:

    "The Comptroller General of the United States warns the nation will go broke within a generation - unless it takes radical steps now to rein in out-of-control federal spending."
    Walker has revealed America's collision course in computer simulations that show balancing the budget in 2040 (under the status quo of spending like there's no tomorrow) could require cutting total federal spending by an incredible 60 percent - or raising federal taxes 200 percent over today's level.

    Go read the article at the link, it is beyond frightening, it shows that the republicans spending money like a crack w*ore in Columbia have already wrought great damage on America, but that the coming consequences WILL be more that America can bear if things don't change IMMEDIATELY.

    This is a NATIONAL SECURITY ISSUE that, unlike nebulous terrorism, can, and has been, computer modeled and the results are astounding.

    bush has cleverly covered his tracks with his budget shenanigans so that the most severe damages he has done to the country won't be apparent until bush has long been out of office.

    A 60% reduction in spending will devastate the economy as badly as a 200% tax increase, and the failure of economic security will bankrupt a government whose biggest spender cannot even pass an audit, such as:

    Defense Budget: Walker argues that Defense Department simply is out of control and that basic rules of accountability don't apply. He said that although it received a whopping $500 billion in appropriations, the Defense Department "is the only agency in the federal government that cannot adequately account for its assets and its expenditures - and cannot withstand an outside financial statement audit."


    The democrats will ignore these warnings at their own peril, but the sinking ship of state will take us ALL down with it.

    This is such (5.00 / 1) (#4)
    by Edger on Fri Dec 22, 2006 at 02:00:51 PM EST
    a huge problem that people tend to shy away from even talking about it. Maybe the enormity of the consequences is just too much to cope with?

    It will take down not just the US economy, but the rest of the world with it. The perfect recipe for more resource wars:

    GAO Chief Warns Economic Disaster Looms

    There's a good reason politicians don't like to talk about the nation's long-term fiscal prospects. The subject is short on political theatrics and long on complicated economics, scary graphs and very big numbers. It reveals serious problems and offers no easy solutions. Anybody who wanted to deal with it seriously would have to talk about raising taxes and cutting benefits, nasty nostrums that might doom any candidate who prescribed them.
    If the United States government conducts business as usual over the next few decades, a national debt that is already $8.5 trillion could reach $46 trillion or more, adjusted for inflation. That's almost as much as the total net worth of every person in America _ Bill Gates, Warren Buffett and those Google guys included.

    A hole that big could paralyze the U.S. economy; according to some projections, just the interest payments on a debt that big would be as much as all the taxes the government collects today.

    And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion.
    By 2030 they calculate Medicare will be about $5 trillion in the hole, measured in 2004 dollars. By 2080, the fiscal imbalance will have risen to $25 trillion. And when you project the gap out to an infinite time horizon, it reaches $60 trillion.

    Medicare so dominates the nation's fiscal future that some economists believe health care reform, rather than budget measures, is the best way to attack the problem.

    Then why have revenues gone up?? (none / 0) (#1)
    by jimakaPPJ on Fri Dec 22, 2006 at 12:15:26 PM EST
    the Republicans take all that hard work and then give away tax breaks to the extremely wealthy.

    And before you accuse me of being a Repub, remember that I'm the guy says that we need a national sales tax to pay for National HealthCare.

    But accuracy is accuracy and inaccurate statements just hurt the argument.

    A national sales tax (none / 0) (#13)
    by Molly Bloom on Fri Dec 22, 2006 at 07:16:08 PM EST
    is regressive. It favors the rich over the middle class and poor. I'm not sure why some people believe that those who are already doing well (and gotten the most out of our infrastructure) should pay less than those who aren't.

    If you want National Health Care, which is (none / 0) (#16)
    by jimakaPPJ on Fri Dec 22, 2006 at 08:59:59 PM EST
    what I spec'd, you are going to have to go to a national sales tax. Too many people, who have health care now, will fight to the death to prevent this from being added as payroll tax.

    National health care = national sales tax? (5.00 / 1) (#18)
    by scarshapedstar on Sat Dec 23, 2006 at 12:12:39 AM EST
    How, exactly?

    And you accuse us of reading from a script? Seriously, at least give us your source for that talking point so we can attempt to make sense of it.


    BS (5.00 / 1) (#21)
    by aw on Sat Dec 23, 2006 at 10:22:26 AM EST
    Read this:HAA Cost Coverage Report

    Ron Wyden's Healthy Americans Act


    Nonsense. (none / 0) (#17)
    by Molly Bloom on Fri Dec 22, 2006 at 10:36:31 PM EST
    Your vision and immagination is limited.

    Except... (none / 0) (#3)
    by jarober on Fri Dec 22, 2006 at 01:58:36 PM EST
    Tax cuts aren't the problem.  Even the NY Times noticed that tax revenues have been rising (as they did after Kennedy's cuts and after Reagan's).  The problem now is the same as the problem then - and it's bipartisan in nature.  When tax receipts rise, Congress spends money faster than the rate of increase.  Raising taxes won't fix that behavior.  What we actually need is fiscal discipline, which naither party has shown any inclination to having.  

    Over the next 30 years, the "untouchable" spending of medicare, medicaid, and social security are going to increasingly crowd out all discretionary spending - whether that spending is oriented to the military, the environment, health care (whatever).

    No one wants to accept that fact.  One of the left's biggest trumpets, Duncan Black, sings "la la la" around the entire problem.  Eventually, when those programs eat the entire budget, there will be some level of reality introduced into the system.  Until then, left and right will cheerfully earmark their way through the pig trough, albeit on different favored programs.

    tax cuts, combined with unrestrained (none / 0) (#5)
    by cpinva on Fri Dec 22, 2006 at 02:11:06 PM EST
    spending is the problem. as a rule, you can't have both, absent the revenues to support them. we've not had them.

    the deficits of the past 5 years have largely been a result of substantial increases in defense spending, indexed increases in other programs, and unpaid for tax cuts.

    while dr. krugman is right in the pragmatic political sense, and we might be able to get away with it for a couple of years, if nothing is done to control those deficits, the house of cards will eventually collapse.

    that is just a mathematical fact.

    There are too many other factors... (none / 0) (#6)
    by Bill Arnett on Fri Dec 22, 2006 at 02:24:32 PM EST
    ...involved to make a statement such as "lowering taxes increases revenues". Remember Reagan/bush1's 12-year rape of the treasury that proved "trickle down economics is voodoo economics?" And how it took Clinton eight years to return fiscal sanity to the budget process? And you look now to the REPUBLICANS for the truth about America's finances?

    There was a monster one time tax break for corporations to bring their earnings back into America, but THAT WAS A ONE-TIME BREAK that will not pertain in the future.

    Also, every time bush releases ANY financial information you have to wait two months or more for the numbers to be revised before you can expect any accuracy, and the situation is always WORSE than what bush would have you believe.

    Sometimes I wonder (none / 0) (#7)
    by scarshapedstar on Fri Dec 22, 2006 at 03:45:35 PM EST
    Has nobody in the government had to pay a credit card bill? What lunacy. No other country on earth is so stupid as to pretend that limitless debt is a good thing. I can't fathom why anyone still uses the dollar.

    Rising Revenues... (none / 0) (#8)
    by jarober on Fri Dec 22, 2006 at 04:10:31 PM EST
    Rising tax revenues during the 80's and the last few years are simple facts.  Due to the 90's boom, they rose then too - the rate hikes of Bush the elder and Clinton were still under the high points of the pre-Reagan time period.  What's also a fact is that both parties spend like drunks in a liquor store.  

    You can yell all you want about "voodoo economics", but that wasn't the problem back then, and it isn't the problem now.  Spending is the problem.  And military spending, while high, is not the same level of problem as the various non-discretionary programs I brought up above.  Demographics are what they are, and those programs are going to eat the budget.  

    The fact that no one wants to deal with that reality doesn't matter - it will rear its ugly head anyway.  When it does, arguing over tax cuts or raises, or military spending adjustments are going to be so much trivia - we won't be able to raise taxes enough to cover the costs (w/o killing the economy), so we'll be left with savage (and likely across the board) spending cuts (or printing money) as the only alternatives.

    Well then lets just cut taxes to 0 (none / 0) (#12)
    by Molly Bloom on Fri Dec 22, 2006 at 07:05:11 PM EST
    and revenues will rise, rise, rise!

    A medical overdose can kill. (none / 0) (#15)
    by jimakaPPJ on Fri Dec 22, 2006 at 08:54:58 PM EST
    Really? (none / 0) (#20)
    by Molly Bloom on Sat Dec 23, 2006 at 08:43:07 AM EST
    If deficits don't matter... (none / 0) (#9)
    by Dadler on Fri Dec 22, 2006 at 04:30:48 PM EST
    ...then the GOP bullsh*t about tax and spend liberals means absolutely nothing.  Less than nothing.  It was a ruse from the beginning.

    Tax cuts don't raise tax revenues (none / 0) (#10)
    by Peaches on Fri Dec 22, 2006 at 04:39:36 PM EST
    Jarbor and Jim,

    Revenues have been rising for the last few years, but have only recently reached the levels of 2000 before the tax cuts when we had a surplus. From the new York times article Jar linked to.

    Democrats and many independent budget analysts note that overall revenues have barely climbed back to the levels reached in 2000, and that the government has borrowed trillions of dollars against Social Security surpluses just as the first of the nation's baby boomers are nearing retirement....Despite almost five years of economic growth, individual income taxes -- the biggest component of federal tax revenues -- have yet to reach the levels of 2000. Even with surging payments for investment profits and business income, individual tax payments in 2005 were only $972 billion -- below the $1 trillion reached in 2000, even without adjusting for inflation.

    So the deficit isn't as bad as it looks, partly because there is currently a surplus in the SS trust fund. and revenue from income taxes is still below the levels reached in 2000

    Revenues also lagg behind economic growth.

    also from your link.

    The fact is that revenues are way below what the administration said they would be a few years ago," said Thomas S. Kahn, staff director for Democrats on the House Budget Committee. "The long-term prognosis is still very, very bleak, and the administration doesn't have any kind of long-term plan." One reason the run-up in taxes looks good is because the past five years looked so bad. Revenues are up, but they have lagged well behind economic growth. The surge could also evaporate as quickly as it appeared. Over the past decade, tax revenues have become much more volatile, alternately soaring and plunging in the wake of swings in the stock market and repeatedly defying government projections. Over all, individual and corporate taxes have lagged well behind the economy's growth over the past five years. Government spending, by contrast, mushroomed far faster than the economy. And federal debt has ballooned to $8.3 trillion, up from $5.6 trillion when Mr. Bush took office. Republicans are trying to raise the authorized debt ceiling to $9.6 trillion.

    Tax cuts do not help the budget, that is a simple fact. and military spending is a huge component of the deficit

    And federal debt has ballooned to $8.3 trillion, up from $5.6 trillion when Mr. Bush took office. Republicans are trying to raise the authorized debt ceiling to $9.6 trillion.War costs for Iraq and Afghanistan have totaled more than $300 billion since 2003, and the Bush administration has not included any war costs in its budget estimates beyond next year.

    Hullo, Peaches (none / 0) (#11)
    by aw on Fri Dec 22, 2006 at 04:49:33 PM EST
    Welcome back.  Did you miss us?

    Your problem is (none / 0) (#14)
    by jimakaPPJ on Fri Dec 22, 2006 at 08:52:22 PM EST
    that you think that the economy exists in a vacuum.

    The purpose of the cuts were to stimulate the economy, which was going into a recession driven by the internet bubble burst and 9/11.

    If the economy had not been stimulated the revenues whould have went straight down the gutter along with millions of jobs.


    The evolution of Krugman (none / 0) (#19)
    by Stewieeeee on Sat Dec 23, 2006 at 01:26:48 AM EST
    from an Economist brilliantly arguing for sound economic policy to a political pundit telling political parties (more specifically, the Democratic Party) how they should go about winning elections and implementing those policies can't be irreversible.

    The tax cuts may have worked well... (none / 0) (#22)
    by Bill Arnett on Sat Dec 23, 2006 at 03:08:40 PM EST
    ...for the rich and well off, but each successive year since bush gave away the country, the amount of taxes my wife and I pay has gone UP by a little over $200 per year WITH NO CHANGES in our circumstances.

    That's despite the fact that all my income is tax-free and we are only paying taxes on my wife's salary.

    So if any of you actually saw your tax liability reduced, count yourself lucky.