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

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.

Phantom Menace and this “turkey of an economy”

Teresa Ghilarducci, who spoke at our May conference, had a great post, “The Second Thanksgiving of the Great Recession,” in the Brainstorm blog on The Chronicle of Higher Education web site. In it, she points to the fact that people seem more worried about the deficit than about the fact that a huge number of people are currently unemployed.

But at least in my admittedly unscientific sample, people’s legitimate anxieties about losing their homes, or jobs, or retirement savings were focused in the wrong place. Instead of calls for continued job creation, I’m hearing a lot of misplaced fear about inflation and the growing federal debt — what Paul Krugman correctly calls the phantom menace.

So, in the spirit of having vigorous family discussions, if your Aunt Teresa the economist had been at your dinner table, here’s what I would have said.
Shouldn’t the Government balance its budget? Sure, over the long term, but no, not now. If the economy was booming, the government should be shrinking  the debt. That is what the Clinton Administration did during its eight years in office, cutting it to zero, and actually leaving a surplus.  And that is what George W. Bush didn’t do, increasing spending on prescription drugs, wars, and unnecessary tax cuts for the wealthy, while not paying for any of it.

Paul Krugman, as Teresa mentions, has also been bemoaning this focus on the deficit in his blog:

When I was on This Week yesterday, George Will tried his hand at the debt scare thing, saying that we’re in terrible shape because by 2019 the interest on the debt will be SEVEN HUNDRED BILLION DOLLARS. (That should be read in the voice of Dr. Evil). I get that a lot — people who talk about the big numbers which are supposed to imply that things are terrible, impossible, we’re doomed, etc.

The point, of course, is that everything about the United States is big. So you have to interpret numbers accordingly. As the graphic above shows — it’s taken from an article that managed to maintain a grim tone while reporting numbers that actually weren’t all that grim — what we’re talking about is a debt-service burden roughly comparable to that under the first President Bush. How many of the people now warning about the impossible burden of currently projected debt were issuing similar warnings back in 1992? Not many, I’d guess.

How cynical are you? Do you believe that this focus on the BIG BAD DEFICIT might serve those who’d like to cut Social Security and Medicare? Need I remind you that fear worked very well in the recent past, when politicians wanted the American public to swallow something they otherwise would have rejected (9/11, 9/11, 9/11; weapons of mass destruction, weapons of mass destruction, weapons of mass destruction).

Don’t let the fear-mongerers win again.

This is a good time to remember Frances Perkins’s words from 1935:

We must devise plans that will not merely alleviate the ills of today, but will prevent their recurrence in the future. The task of recovery is inseparable from the fundamental task of social reconstruction.

I’ll end with another quote from Teresa’s post:

Aunt Teresa reminds you that economic policy makers respond to particular historical and economic situations. Inflexible theology does not help. Our situation now calls for continued government deficit spending, keeping interest rates virtually at zero, and doing everything possible to create jobs. When the economy begins to recover, then we should fight inflation.

When an overweight patient with high blood pressure and high cholesterol has a heart attack, there are lots of things that should be done over time to make the patient healthy — better diet, exercise, proper medication. But first you have to save their life and deal with the heart attack. That’s our economy now — we need to save the patient, and then do the long-term rehab (deficit reduction, stricter regulation of the financial sector, stronger government guarantees for retirement savings) to stave off future crises.

I hope you had a Happy Thanksgiving weekend, and that this turkey of an economy is better by next year.