September 26, 2017
My friend and occasional co-author, Jared Bernstein, had a piece in the NYT saying that Republicans don’t care about budget deficits. The evidence certainly supports that view. As Jared points out, they repeatedly push through large tax cuts that come with no offsetting cuts in spending. As fans of arithmetic everywhere know, if you spend the same amount (sometimes they increase spending, by appropriating more money for things like prisons, walls, and the military), and take in less money, then you have a larger deficit.
Presumably, people who keep acting to raise the budget deficit, don’t care about high budget deficits. I’ll add two points here.
First, the media, including often the NYT, cover for Republicans on this issue by telling their audience that Republicans “believe” that lower taxes increase growth, thereby raising enough revenue to offset the tax cut. This is incredibly irresponsible reporting. (You could even call it “fake news.”)
Reporters don’t know what the politicians believe. When they assert politicians “believe” something to be true, they are just making things up. As we all know, politicians don’t always tell the truth. Reporters know what politicians say, not what they believe. Furthermore, since the assertion is so obviously not true, it seems unlikely that many Republican politicians really believe it.
The responsible way to report on this issue is to tell readers that a politician “claims” or “says” that tax cuts will pay for themselves with stronger growth. (A BTP reader told me of an exchange with a NYT reporter in which the reporter said that the NYT doesn’t use the word “claims,” because it implies that the person may not be telling the truth. If this is the case, that is an unfortunate feature of NYT’s reporting.)
My other issue with Jared’s oped is his comment that interest rates have not risen in the U.S., in spite of high budget deficits, in part because of the inflow of foreign capital.
“In addition, global financial flows have accelerated in recent years, and the United States has been a prime destination for that money. That’s increased the supply of loanable funds and pushed down rates regardless of the magnitude of the federal budget deficit. Meanwhile, we’ve been experiencing “secular stagnation” — persistently weak demand, even in recoveries like the one we’ve seen over the last several years — which is associated with higher savings, less investment (think of firms sitting on their earnings or buying back shares versus reinvesting) and lower interest rates.”
As Jared and I have written, the inflow of foreign capital is directly connected to the “secular stagnation” we have been seeing over the last decade. The inflow of foreign capital raises the value of the dollar. A higher dollar makes U.S. made goods and services less competitive in the world economy. This makes our trade deficit larger. A larger trade deficit means less demand in the economy.
Our current trade deficit is a bit less than 3.0 percent of GDP ($540 billion a year). Suppose foreign capital inflows slowed sharply and the dollar fell, bringing our trade deficit down by 2.0 percentage points of GDP. This would provide a boost to demand equivalent to a government stimulus of $380 billion a year (roughly the size of the Obama stimulus). Secular stagnation would almost certainly disappear in this context.
The point is important since secular stagnation is not some mysterious force that settled on the economy like a new virus for which our immune system is unprepared. Secular stagnation results from a loss of demand due to a large trade deficit. This is all right in front of our eyes, there is nothing mysterious about it.
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