April 10, 2018
The Washington Post is trying to scare people about budget deficits. Okay, that is not exactly news, it has been trying to scare people about deficits to justify cuts to Social Security and Medicare benefits and other programs for decades, but they are redoubling their efforts now. (In fairness, the Republican tax cut gave them more material.)
Heather Long gives us the classic story:
“The United States is able to run such high deficits because the U.S. Treasury turns around and sells U.S. debt to investors around the world. Right now, a lot of people want to buy U.S. government bonds, even though America already has $15 trillion in debt owned by the public. But the problem is no one knows when people might say enough is enough and stop buying U.S. debt — or demand much higher rates of return.
“Even if the nightmare scenario doesn’t materialize, deficits are a drag on the economy. Investors opt to buy government debt instead of making the type of private investments that create jobs or raise wages, economists warn.”
Okay, so the bad story is that the large amount of bonds issued to finance the deficit will lead to high interest rates. (This actually skips a step. The Fed could buy these bonds, ensuring rates don’t rise, as it did in its quantitative easing days. Its ability to buy bonds is limited by inflation concerns.) But Long tells us that even if interest rates don’t rise, government borrowing is still crowding out investment. Really?
How would that work? Suppose I’m Joe Entrepreneur. I want to borrow $20 million to kick-start my totally hare-brained cryptocurrency that should be worth billions in today’s market. How does the government’s borrowing get in my way? If interest rates rose, the answer is clear enough, I would be paying higher interest on my loans and the world may be deprived of my new cryptocurrency because it no longer looks like such a good deal. But if interest rates remain low, as has been the case how would this work?
There is the story that interest rates will rise sharply, which is sort of what the Congressional Budget Office predicts, but they have been saying this for a while, like the last eight years, and have been wrong. If your model has been consistently wrong in the same direction for eight years, it might suggest you have a bad model.
To take the opposite case, suppose we need large budget deficits to sustain demand in the economy. Some folks may remember the Great Recession that followed the collapse of the housing bubble. The problem that led to mass unemployment was that we did not have enough demand in the economy. This often passed under the term “secular stagnation.”
There actually is a simple explanation for this lack of demand. The upward redistribution of income meant that people spent a smaller share of their income since Bill Gates will spend a smaller portion of an additional dollar of income than a retail clerk or assembly line worker. (This is offset by the wealth effect from high stock and housing prices.)
The other reason for a lack of demand is a trade deficit of roughly 3.0 percent of GDP. This is money that is creating demand in Europe, Japan, China and elsewhere. A higher trade deficit means less demand in the United States, other things equal, as fans of intro econ everywhere can tell you.
This lost demand can be made up with large budget deficits, which is what we are seeing today. Running a smaller deficit in this context means less demand, less output, and less employment. The failure to run large enough budget deficits to sustain full employment has cost us trillions of dollars of output over the last decade and has permanently reduced the economy’s potential, imposing an enormous burden on our children.
Of course, The Washington Post and Peterson-type deficit hawks don’t have the integrity to ever acknowledge the harm caused by their policies. But the damage is everywhere in the form of higher unemployment and ruined lives. (Yes, and ruined children’s lives, since children raised by unemployed parents do more poorly by almost every measure.)
Since we’re on the deficit/debt topic, why do these people never talk about patent or copyright monopolies? The government grants these monopolies as a way to pay for innovation and creative work. They are alternatives to direct spending. The public payment takes the form of patent and copyright rents. These payments dwarf the interest burden from the debt, with the rents from drugs alone coming to more than $370 billion annually or nearly 2.0 percent of GDP. This is more than twice the size of the current debt service burden after netting out money refunded from the Fed. (You can read a more detailed discussion of the cost of these monopolies in my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)
There is no honest way to discuss the burden of the debt without also talking about the burdens created by these government-granted monopolies, but no one expects much honesty on this topic when it comes to The Washington Post.
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