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What can we learn from this?

WHEN DICK CHENEY SAID, “ Deficits don't matter,” economists took that as proof of the economic illiteracy of the Bush administration. But it turns out there is a case to be made that Cheney was onto something...clip....The budget deficit may be larger than we would like, and Dick Cheney may have been overstating things a bit, but so far it hard to say that his view of budget deficits is clearly wrong.

“ On the political level, treating deficits as a non-issue also proved a successful strategy. After all, despite the torrent of red ink that splashed across the national budgets during his first term, George W. Bush was reelected by a substantial margin. ”

Among John Kerry's other failures was his attempt to saddle the president with the label "profligate."

This statement encapsulates one of the central political problems of our time. Whatever you think of John Kerry (I pretty much think of him as a snobbier form of Al Gore -- but still an idiot) he didn't lose the election to GWB by all that much. It was close. So the Media making blanket statements about the centrality of a single political idea -- like Deficits Don't Matter -- is both wrong & dangerous. A whole lotta Americans, including Conservatives, thought runnaway spending & deficits were a problem.

I’m going to pull rank here.

Small and occassional deficits do not matter. Big and continuing deficits matter a lot.

Basically, when the financial market perceives that a country will have difficulty servicing its debt, it will begin to require a default or inflation-risk premium. When this kicks in, it is probably already too late to do anything.

When Cheney said what he did, the natioanl debt was maybe 30 percent of one year’s GDP. It has now suddenly increased to 70 percent. We were in the safe zone when he said what he did. We are now risking default or inflation.

I trust what I said is plain old common sense. You can my word for it, there is very good economic theory and experience to support what I said.

Larry Lindsey, Bush's former chief economist, points out in his latest client advisory that "The projected 2006 budget deficit of 3.0 percent of GDP is reasonable if the economy continues to grow."

The economy grew and it continued to grow. At one point Steve Forbes said the US economy had grown by as much as the size of the entire Chinese economy. It’s like we put a China in our pocket.

To the extent that this growth was due to tax cuts (increased economic freedom and opportunity), the economic growth was good and provided a foundation for the future.

To the extent that this growth came from juicing up the housing market with subprime loans, it was like dancing on a keg of dynamite. When government pushes one sector like that, it produces a misallocation of resources. Too much housing, education, or anything else, means too little of something else. It also leads to a glut in the favored sector - that will have to be worked off at a later date.

Socialism results in a misallocation of resources (That’s bad). FDR may have started Federal intrusion into housing in 1938 when he created Fannie Mae. Bush couldn’t have stopped Federal meddling, but perhaps he could have done more to reduce it. Of course with Obama, Reid, and Pelosi, we can expect much more government meddling (control).

The last I heard about the Obama deficits were that they were huge, given a growth projection of 4%. I don’t see economic growth of 4% with our Democrat (socialist) party in charge.

I can’t recommend investing in the stock market (investing in America) at this time. The stock market and free market are not in charge. Pelosi, Reid and Obama are in charge. Obama has encouraged that people invest in the stock market. (Rich people, give me your money.). When he announces that investing in the stock market is good - morally good, good for the economy, good for America and the world - then I may listen. When he admits that there is no way that government decision making can be as good as the decision making of millions of people, spending their own money - not someone else's, then he may get my vote.

SPENDING MATTERS.

Deficits are a symptom, but the underlying problem is over-spending.

SPENDING matters. All deficits derive from over-spending that is not paid for from taxes.

SPENDING matters. It is SPENDING that determines the actual cost of Government.

Deficits actually don’t matter much compared with spending, since deficits are a result of accounting for how to pay for Govt. Deficits are taxation-by-installment-plan. We pay later.

Lowering deficits by increasing taxes does NOTHING to reduce the cost of Government; it just shifts the accounting forward on the price paid for that cost to the present day from a future one. As such, attempts to close deficits by higher taxes can create more pain in reduced economic activity for very little gain in terms of added revenue. The result, which you see in Cali, Michigan or third world countries, is a death spiral of Govt unable to pay for itself. The fundamental cause is not “deficits”, but a GOVT THAT IS SPENDING BEYOND ITS ABILITY TO PAY.

Changing tax laws and tax reform likewise can reduce burden of taxation if improved in a way to make taxes less punitive and more efficient (eg lower tax rates improve the economy via less tax avoidance), but tax reform and tax reduction can NEVER REDUCE THE COST OF GOVERNMENT. Only changing the SPENDING can do that.

School that pay for things with bonds could conceivably raise taxes to pay for those same things, but the burden to taxpayers is not reduced thereby. For such capital expenses, bond-based deficit spending has been used to good effect. But it remains that all spending is eventually paid for somehow, now or in the future. So SPENDING MATTERS.

The USA under obama may well enter in a zone of unsustainable over-spending. The CBO scoring on Obama’s budget is beyond tragic - $10 TRILLION in new debt in 8 years, driven by a Federal spending level that next year will eat up close to 27% of GDP. The Govt is taxing at the 17% level. Higher taxes will cripple the economy NOW, $10 trillion in new debt will cripple the economy LATER. That is a Hobson’s choice - the real answer: Fix the SPENDING.

That mismatch of price of Govt via taxes and cost of Govt through spending creates deficits. In the case of Obama, this is a huge yawning chasm.

Since 100% of spending eventually has to be paid for,
SPENDING MATTERS.

Focus on the SPENDING - fix the spending - and you can resolve the deficit and the problem with excessive burdens of taxation as well.

As Carville would put it: It’s the SPENDING stupid.

Oh, deficits do matter, from a monetarist, keynesian or international balance of payments perspective. And even from an austrian perspective.

Monetarists and keynesians essentially both believe in counter-cyclical policy - loose (inflationary for monetarists, budget deficits for keynesians) when the economy is in a downturn, tight during growth. But both agree that perpetually loose or perpetually tight policy is by definition not counter-cyclical.

From an internation perspective, the current global financial system requires US trade deficits and budget deficits. Nixon & Kissinger moved to world from gold-backed dollar reserves to dollar reserves based on a promise of US trade deficits (instead of dollars being convertible to gold, they are convertible to the ability to export to the US and invest in the US), US budget deficits (providing a safe investment vehicle for sovereign funds and foreign investors) and US oil imports (propping up the demand for dollars by requiring dollars in order to buy oil).

The essence of the Triffin Paradox is the unsustainability of the system. Ongoing growth in US budget deficits, trade deficits and energy imports make the US economy vulnerable. But any reversals in US budget deficits, trade deficits, and energy imports makes the entire global system and the dollatr’s value vulnerable.

Deficits matter if they increase the public debt to unsustainable levels. However, this data point justifies the Cheney view somewhat, as public debt remained tame under Bush:

http://www.heritage.org/research/features/BudgetChartBook/fed-rev-spend-2008-boc-P8-Public-Debt-as-Share-of-GDP-Is.html

I was genuinely surprised to see that public debt is only 38%, or below the 50 year average.

How can that be with all this talk of huge deficits and fiscal recklessness?... the answer lies in 2 facts. #1) Under bush the economy grew fairly well from 2002 to 2007. Depite the current recession, we are larger economy than in 2002.

#2) the fact that a lot of the debt is in the Soc security IOUs. The USA is a bit like GM was back 10 years ago. Our debt wasnt bad but we have a large pension liability coming due. For USA thats the boomer retirements.

The coming wave will drive huge spending increases unless it is stopped:
http://www.heritage.org/research/features/BudgetChartBook/fed-rev-spend-2008-boc-P4-Entitlements-Alone-Will-Eclipse.html