Notwithstanding the neo-Hooverite talk from stimulus-program opponents, the current deficit isn’t too large. If anything, it may need to be even larger to revive the economy.
The government, in its efforts to stimulate the economy and fight a deepening recession, is doing what to many people seems counterintuitive – increasing spending and putting our country further in debt.
I’m admittedly no economic expert, and I have to resort to reading and listening to those who are. There are plenty of non-experts giving their opinions here at OneUtah and elsewhere. And opinions are like . . . well I won’t go there. But there is a great deal of hysteria without serious economic understanding when it comes to the deficit. So when I read the article, I felt it important to share here.
The good news is that there is little disagreement among economists who have studied the issue. The consensus is that short-run deficits help end recessions, and that whether long-run deficits matter depends entirely on how government spends the borrowed money. If failure to borrow meant forgoing productive investments, bigger long-run deficits would actually be better than smaller ones.
In 1929, President Herbert Hoover thought that the best response to a collapsing economy was to balance the federal budget. With incomes and tax receipts falling sharply, that meant cutting federal spending. But as almost all economists now recognize, President Hoover was profoundly mistaken.
When a downturn throws people out of work, they spend less, causing still others to be thrown out of work, and so on, in a downward spiral. Failure to use short-run deficits to stimulate spending amplifies that spiral, causing further declines in tax receipts and even bigger deficits. That this path makes no sense is a settled issue.
It turns out, though there is deficit spending and then again there is deficit spending. It does matter how the money is spent.
The main issue is what we do with the borrowed money.
If we simply use the money to buy bigger houses and cars, deficits make us unambiguously worse off in the long run. That’s why the explosive increase in the national debt during the Bush administration was a grave misstep.
Trillions of dollars, many of them borrowed from China, financed tax cuts for the wealthy, who spent much of their added wealth on things like bigger mansions. But beyond a certain point, when everyone builds bigger, the primary effect is merely to raise the bar that defines the size of home that people feel they need. Much of the interest we’ll pay on debt incurred during the Bush years is thus money down the drain.
Let’s put into perspective the current rate of deficit. Even though the numbers are astronomical and make for great hysterical fodder on the floor of the U.S. Senate and House, let’s consider just what it means.
Over the last eight years, Bush administration deficits raised the national debt by almost $5 trillion. Given the current crisis, it’s easy to imagine a similar increase during the next four years. At recent interest rates, servicing $10 trillion of extra debt costs about $400 billion annually — a big amount, to be sure, but less than 3 percent of the economy’s full-employment output. We’ll still be the richest country on the planet even after paying all that interest.
Once the downturn ends, there should be no need to incur additional debt. Indeed, there are many ways to pay down debt without requiring painful sacrifices.
There’s plenty of room for discussion on this idea. I do hope commenters will let us know their sources and their credentials since it’s important for us to discern between opinions and real expertise.