Danger posed by deficit "is zero"

Discussion in 'Politics' started by Industrialsize, May 14, 2010.

  1. Industrialsize

    Staff Member Moderator Gold Member

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    A Different take on the current deficit

    Galbraith: The danger posed by the deficit ‘is zero’



    James Galbraith is an economist and the Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas at Austin. He's also a skeptic of the prevailing concern over America's long-term deficit. With many people now comparing America's fiscal condition to Greece, I spoke with Galbraith to get the other side of the argument. An edited transcript of our conversation follows.

    EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.
    JG: No, I think the danger is zero. It's not overstated. It's completely misstated.
    EK: Why?
    JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.
    So there are two possibilities here. One is the theory is wrong. The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity.
    EK: Then why are the bulk of your colleagues so worried about this?
    JG: Let's push a bit deeper on the CBO forecasts. They publish a baseline set of projections. One of those projections holds the economy will return to a normal high-employment level with low inflation over the next 10 years. If true, that would be wonderful news. Go down a few lines and they also have the short-term interest rate going up to 5 percent. It's that short-term interest rate combined with that low inflation rate that allows them to generate, quite mechanically, these enormous future deficit forecasts. And those forecasts are driven partially by the assumption that health-care costs will rise forever at a faster rate than everything else and by interest payments on the debt will hit 20 or 25 percent of GDP.
    At this point, the whole thing is completely incoherent. You cannot write checks to 20 percent to anybody without that money entering the economy and increasing employment and inflation. And if it does that, then debt-to-GDP has to be lower, because inflation figures into how much debt we have. These numbers need to come together in a coherent story, and the CBO's forecast does not give us a coherent story. So everything that is said that is based on the CBO's baseline is, strictly speaking, nonsense.

    Ezra Klein - Galbraith: The danger posed by the deficit ?is zero?
     
  2. B_spiker067

    B_spiker067 New Member

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    Tell it to the PIIGS - Portugal, Italy, Ireland, Greece and Spain.

    And next probably England.

    P.S. The markets aren't rational and that is because they hardly ever take money away from individuals or send them to prison for the fraud and malfeasance that they perpetrate.
     
    #2 B_spiker067, May 14, 2010
    Last edited: May 14, 2010
  3. LambHair McNeil

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    Amazingly coincidental that this sort of analysis was not being presented when Bush was running two wars off-the-books that will have final costs in the $1 - $2 Trillion range and was seeing "regular" published deficits in the $400 billion range some years. That was a squandering of the budget surplus projected for the 2000 - 2010 time frame and was emblematic of his general ineptitude.

    Now that we can read deficits will meet or exceed $1 Trillion per year until at least 2020 (right before the Medicare & Social Security poo starts seriously smacking the fan, mind you) here's an article that says deficits aren't anything to worry about - ???because...why? They're (now) being accrued to meet liberal policy objectives???
     
  4. D_Tully Tunnelrat

    D_Tully Tunnelrat New Member

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    I agree, the markets are not rational, otherwise we never would have seen the miss pricing of risk, which blew everyone up in '08, and has driven the Dow down by 1K points in an afternoon this year. If markets were purely domestic, then rationality might enter more into it, but would never be the case. Now that we have more and more US Treasuries held by foreign, principally Asian creditors, their interest rate demands, or notions of risk pricing are entirely different from our own. One, because they already own so much low yielding debt, and two because their currency is pegged to ours. So, they cannot beggar thy neighbor entirely, when it comes to Treasuries, as it will undermine their present holdings both in dollar value, and in yield. That's an entirely different market than we had in the '40s' when our debt was even more astronomical. Then it was funded by Americans who viewed bond purchases as an act of patriotism. That will never be the case with China or Japan. Their only interest in our interest is in keeping their people employed to the highest extent possible. Otherwise, in the case of China, their political structure is hanging by a thread. For now we are their biggest customer, should that change, and should their currency begin to float, then we will see a very different pricing of risk in the US treasury market. Any time a country's debt hits 90% of GDP, which the US is at, or way over, depending on how you calculate it, the risk of default rises exponentially. The US will never default, but monetizing of debt, and printing presses do the same thing.
     
  5. JTalbain

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    Actually, it's only now that anyone is noticing the enormous cost of the war in Iraq. If you recall, rather than take the approach that short term deficits aren't dangerous, Bush took the approach of telling everyone that the war would pay for itself in Iraqi oil. In short, he said the war was free. We believed him then, and a lot of people still believe him now.

    And actually, what he was saying in the article was that deficits aren't something to worry about, because the very nature of the program addresses other issues which also contribute to GDP, and hence the deficit. If the program writes checks to anyone, it employs people, and it raises employment, which raises GDP, which increases tax revenues, which decreases the deficit. Additionally, the healthcare legislation is projected to decrease medical costs in the long run. What he was saying is that the doomsday forecast being spouted right now assumes that the costs of the bill will be there, but that none of the benefits will. And he is right; with as big and public as the bill is, you should be seeing an impact in 20-year interest rates, but you aren't.
     
  6. sargon20

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    Along similar lines:

    We’re Not Greece

    It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.


     
  7. LambHair McNeil

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    People may be noticing the aggregate cost of both wars because it's hit a magical press reporting figure of $1T, but the effect of the deficit-financing of both efforts has been steadily accumulating and has been felt all along the way.

    As Greece has found out, if government decides to drive job creation and spends more per job in doing so than what it would cost the private sector to create those jobs, then a crowding out effect takes place. It's further compounded by the fact that many long-term govt jobs are not GDP-creators, so to speak.

    As even the Director of the CBO has said about the health care bill, it can only possibly bend the cost curve downward in the 2020's IFF government totally leaves the bill alone during that time...something Congress isn't wont to do. In the best of situations, predicting what a bill passed in 2010 will do to HC costs by the time 2030 arrives is likely going to be wrong - let alone with (I predict) constant fiddling by Congress and White Houses in power & to come.

    I still say the timing for an article such as this one is suspect. Bush's deficits were to be the fiscal damnation of us all and now they're the key to economic salvation. I guess economics does make strange bedfellows, as it would appear Dick Cheney and James Galbraith are in basic agreement on this subject.

    Time for a drink.
     
  8. D_Tully Tunnelrat

    D_Tully Tunnelrat New Member

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    Egad. Pour me, and both of them one as well, if you could get the two to sit next to each other. Barmates, and bedfellows...
     
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