The Blog of the Frances Perkins Center

“The danger posed by the deficit ‘is zero'”

In Economics, Political world on May 14, 2010 at 7:44 am

Two eminent economists strongly debunk the current deficit scare tactic in which the financial condition of the U.S. is likened to that of Greece. Here’s an excerpt of an interview with James Galbraith by Ezra Klein in the Washington Post:

EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: No, I think the danger is zero. It’s not overstated. It’s completely misstated.

EK: Why?

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn’t be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

In We’re Not Greece, an Op-Ed in the New York Times today, Pal Krugman says:

It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.

So here’s the reality: America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem, which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes. But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.

Both pieces are worth reading for their explanation of what’s really going on. Let’s hope the message gets wide distribution.

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