Nov 24, 2009
The country is being bombarded with stories claiming that record
budget deficits threaten our children's future and jeopardize the
credibility of the dollar. These stories are a serious problem -- they
have hugely confused the public about the nature of the country's
economic crisis. And both parties share the blame.
Starting with the reality behind the scare stories --
trillion-dollar deficits are really huge relative to the money that any
of us will ever see in our lifetime. But this is an absurd measure. The
United States is a country with more than 300 million people. It
doesn't matter that a trillion dollars is a huge amount to any of us
individually. What matters is the size of the deficit and the debt
relative to the size of the economy.
Only people who want to deceive the public would talk about the
deficit or debt in "trillions" of dollars. This is a very simple
lie-detector test since honest economists and policy analysts always
refer to these sums relative to the size of the economy.
Relative to the size of the economy, the deficits that we are
running are large and the debt that we are projected to incur is
substantial, but the deficit level is still not coming close to the
levels hit in World War II. Nor is the debt level projected to reach
post-war peaks or the levels sustained by countries like Italy and
Japan. The idea that we are near some debt-driven crisis is absurd on
The United States had the strongest period of growth in its history
in the three decades following World War II. This undeniable fact
should put to rest the idea that our debt levels will threaten the
prosperity of future generations. We hand our children a whole economy
and society. If we give them a bad education, a decayed infrastructure,
a ruined environment, then we will be jeopardizing our children's
economic well-being. However, the debt levels we are currently
projecting aren't even large enough to make it to the list of serious
The claim that the dollar faces an imminent crisis because of the
budget deficit or national debt is readily refuted by the example of
Japan. Japan already has a debt to GDP level that is far larger than we
are projected to have by the end of the next decade. In spite of this
debt burden, investors are willing to hold ten-year Japanese government
bonds at just a 1.5 percent interest rate. If these debt burdens are
supposed to make Japan a high risk, someone forgot to tell the people
who are putting billions of dollars on the line by holding Japanese
There is another side of this Japan story that makes the idiocy of
the deficit scare stories even more apparent. According to the deficit
fear mongers, the dollar has been falling in recent months because
investors are becoming increasingly worried about the U.S. government's
ability to pay off its debt. But one of the currencies that the dollar
has fallen against is the yen. Are investors who are worried about the
U.S. government's ability to pay off its debt selling dollars to buy
the bonds of the Japanese government, which has an even higher debt
Let's face it: The deficit hawks will say anything to advance their agenda. Even worse, the media will print it.
This deficit nonsense should have been put to rest long ago, but
both parties have hyped it to advance their ends. Currently, the
Republicans are making headway in the polls by blaming the Obama
administration for a deficit that is primarily the result of economic
mismanagement during the Bush years.
But Republicans don't have a monopoly on demagoging the deficit.
During the Bush years, many Democrats spoke of the Bush deficits in
cataclysmic terms. This was absurd. The deficits were larger than was
desirable during part of the Bush administration (large deficits in
2002 and 2003 were helpful in boosting the economy), but they were not
hugely out of line. There is certainly no story that can pass the laugh
test in which these deficits are responsible for the collapse of the
housing bubble and subsequent recession.
There were plenty of grounds to attack President Bush for the
economy's performance under his watch. Most importantly, he let an $8
trillion-dollar housing bubble grow unchecked, and giving big tax cuts
to the wealthy is not the way to create an educated workforce and a
But the Democrats often hyped the deficit -- it was the easiest way
to score political points. That helped to give us a situation in which
tens of millions of people somehow think the deficit is the cause of
the economy's problems when in reality it is the only thing keeping it
afloat. In short, the Democrats are paying the price of their own
political opportunism. Unfortunately, so is the rest of the country.
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