In the movie Lars and the Real Girl,
the main character imagines that a female blow-up doll is his fiance.
To humor Lars, his brother and sister-in-law go along with the charade.
Over the course of the movie, more people are drawn into the circle,
until eventually the whole town is treating Bianca the blow-up doll as
one of its leading citizens.
This seems to pretty well describe the debate over the budget
deficit, except it's not clear that many people realize it's a charade.
The main story is that Lars' budget hawk counterparts are upset that
the deficits projected for 2013 or 2019 are too large. They want
President Obama to commit to spending cuts and/or tax increases in
order to bring these deficits to levels they consider acceptable.
The unreality of this picture is striking because the budget hawks
seem not to notice that we are in the middle of an economic meltdown.
People are losing their homes through foreclosures at the rate of
more than 100,000 a month. The default rates on credit cards, car loans
and other debt is at record levels. Most of our major banks are
effectively insolvent.
Home and stock prices have plummeted, destroying most of the wealth
of the baby boom cohort as they stand on the edge of retirement. The
economy is shedding almost 700,000 jobs a month, with the unemployment
rate rapidly approaching the highest level since the Great Depression.
In this context we are supposed to be up in arms over the deficit
projections for 2013 or 2019? This is a bit like someone complaining
about the lawn not being mowed at a time when the house is on fire,
it's just not the first priority. And the media all seem to go along
with the charade - yes, they are very concerned about the projected
deficit for 2013, just as the characters in the movie expressed concern
about the health of Bianca the blow-up doll.
It is especially annoying to hear the whining from this group of
deficit hawks since their whining in prior years helped to drown out
serious discussion of the dangers posed by an $8 trillion housing
bubble. While some of us were yelling at the top of our lungs about the
imminent disaster that would hit the economy when the housing bubble
burst, the media chose to focus on these deficit hawks with their dire
warnings about budget deficits 40 or 50 years in the future.
Because the media and political elites chose to pay more attention
to the deficit hawks than those warning about the housing bubble, we
now get to enjoy the current economic crisis. And, one result of the
economic crisis is (drum roll, please) ........record deficits.
To put the point so simply that even a Washington Post
editor can understand it: because the media highlighted the views of
the people who were ranting about the deficit rather than the views of
people who understood the economy, we both got a wrecked economy and
larger deficits.
The moral to this story is that the economy must take priority, not
only because the state of the economy is what most directly determines
people's well-being, but also because the state of the economy will be
the most important determinant of the deficit.
The experience of the 1990s provides an example of exactly this sort
of story. In January of 1994 the Congressional Budget Office projected
that the deficit in 1999 would be $204 billion or 2.4 percent of GDP.
This projection incorporated the impact of President Clinton's tax
increase and spending cuts.
It turned out that there was a surplus of $125 billion in 1999, or
1.4 percent of GDP. This shift from deficit to surplus of 3.8
percentage points of GDP (equivalent to $540 billion in 2009) was not
caused by further spending cuts or tax increases, it was caused by the
strong economic growth of the period.
There is no guarantee that President Obama's policies will be
successful in restoring strong growth, but they are clearly a step in
the right direction. If we have strong growth, then our deficits will
be manageable. If the economy remains weak, the deficit will remain a
serious burden no matter how much we raise taxes or cut spending.
Someone has to tell the deficit hawks that their blow-up doll is not real. The issue is the economy, not the deficit.
