Posted on 07/16/2003 8:11:30 AM PDT by Isara
Budget: The budget deficit is expected to jump to $450 billion this year, causing some deficit hawks to warn of a growing "crisis." Sorry, but the crisis doesn't exist.
Those who fear the deficit seem surprisingly immune to any lessons from history.
For history shows that most of what we hear about the deficit is wrong. This deficit, in the truest sense, isn't a "record." It's not even close. This year the deficit will come in at about $455 billion, or 4.2% of GDP, which is the most meaningful way to measure spending gaps. How big is that? It doesn't even make the top five since 1980.
Yet we're repeatedly warned that record deficits will drive up interest rates. The logic behind that thought, while impeccable, isn't supported by reality.
Let's look at the record. At the start of the 1980s — another period of "record" deficits — the 10-year Treasury yield got as high as 15%.
Despite the continued presence of deficits, the 10-year sank to 8% by the end of the 1980s. Interest rates continued to fall during the 1990s. By 2000, the U.S. had triumphed, posting a record surplus. Yet the 10-year Treasury note was still over 6%.
Since then, the deficit has surged. So interest rates have surged too, right? Nope. Long rates are below 4%. It's pretty clear. If there is any link at all between deficits and interest rates, it's very weak.
But now that the White House, as one headline put it, "admits" to the "record" deficit, deficit foes say it's clear something has to be done. But what? In fact, what we're seeing right now is entirely normal. After an economic downturn, the deficit always gets worse.
It's a pattern that can be seen in each of the last three recessions. Since 1980, the deficit has averaged 4.5% of GDP in the year after the economy bottomed — just about where it is now.
The reason for this is simple. A shrinking economy brings in less money. So the government spends like crazy to make up the difference, and the deficit gets worse. But as the economy starts to grow again, the deficit-to-GDP ratio will shrink sharply. It always does.
We're not Pollyannas. We don't say deficits are good things. Or that the government should just spend without heed. It shouldn't.
But excessive fear of deficits is often used as a bludgeon against good ideas like tax cuts, which inarguably lead to higher growth and a healthier economy. Meanwhile, as those who oppose tax cuts wail, Congress is boosting spending at an 8% annual clip.
As President Bush's top economist, Stephen Friedman, has noted, just holding the line on that spending for a few years — letting it grow at a pace less than GDP — would cut the deficit to zero in a decade or so. That's the best way to erase the deficit.
In the meantime, relax. This is no record deficit. Back in 1943, during WWII, the deficit hit 30.3% of GDP. Now, that was a record.
The chart may disappear when IBD updates their website.
How do you say that? It makes a BIG difference.
Did you respond to the editorial or just gave your opinion?
From the editorial,
"We're not Pollyannas. We don't say deficits are good things. Or that the government should just spend without heed. It shouldn't.
But excessive fear of deficits is often used as a bludgeon against good ideas like tax cuts, which inarguably lead to higher growth and a healthier economy. Meanwhile, as those who oppose tax cuts wail, Congress is boosting spending at an 8% annual clip."
Worse, using it to excuse this deficit is letting the government get away with spending way too much.
Regardlless of whether the GDP means anything or nothing at all, there needs to be a benchmeark to measure the deficit against. Maybe the benchmark should be the deficit as a percentage of total revenues for the Federal Government. Without some sort of benchmark, the $450 billion "record deficit" is as stupid and meaningless as stating that a particular movie is the "highest grossing movie of all time," without adjusting the figure to equalize the price of a movie ticket.
Nothing of the such is being done. What is being done is informing people with information to use against leftists when they start ranting about "record" deficits.
Inflation is a good thing, when it is small and under control. The last thing we want is deflation.
The critical benchmark is the Gross Federal Debt as a percentage of GDP. The main significance of the deficit is simply that it is added on to the debt. It is the debt, not the deficit, that our children and grandchildren will have to pay interest on forever. You can see a graph of this benchmark at http://home.netcom.com/~rdavis2/debt40.html. This is from the Budget released last February so the future outlook is now somewhat worse. Still, even this graph shows that the debt to GDP ratio is rising. In addition, this does not account for the pressures that will be caused by the retirement of the Boomers. That can be seen in the government's own long-term projections shown at http://home.netcom.com/~rdavis2/pro2004.html.
Another, Don't believe your lying eye's, believe what I'm telling you stories. Of course the deficit matter's, it's called spending more than you're worth. It's called sinking my kid's and grandkid's in debt up to their ass. The bill will come due.
SFR
Deficit spending is the least cost method to stop socialism and eventually reverse it. Conservatives don't have the votes to reduce government spending directly. Instead we have to use political judo to get the spenders to run out of funds. Only then can you get socialists to vote for smaller government. California is a current example of this process. The socialists are being forced to vote for spending cuts and government layoffs, something totally against their nature.
"We're not Pollyannas. We don't say deficits are good things. Or that the government should just spend without heed. It shouldn't.
But excessive fear of deficits is often used as a bludgeon against good ideas like tax cuts, which inarguably lead to higher growth and a healthier economy. Meanwhile, as those who oppose tax cuts wail, Congress is boosting spending at an 8% annual clip."
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