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

[Mass]

Something I find interesting on DU is the lack of interest on this issue. I am very weary concerning the noise made in some Democratic quarters to cut entitlement programs and services that help poor people to solve this problem. Though there are other solutions, they seem to have been deemed out of the picture now.

http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html

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.
...

EK: What are the policy implications of this view?

JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we'd be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I've supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That's one difference between us and Europe.

EK: That does it for my questions, I think.

JG: I have one more answer, though! Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets.
...

[madmax]

1. k & r

[xchrom]

2. Recommend - irrational indeed.

Or crazy like a fox.

[Name removed]

3. Deleted message

Message removed by moderator. Click here to review the message board rules.

[geckosfeet]

4. 11.2 million Greek citizens disagree.

[fasttense]

6. Was it really their deficit that caused the problem or the type of loans they took

and corruption?

And why are the bankers NOT restructuring those loans for Greece? Why do the bankers think they need to be paid like it was 2001? This whole thing smells of corruption and cons. But don't worry, the IMF will take it out of the people's hides.

[geckosfeet]

8. Soverign debt. I would expect that it is closely related to national deficit.

Not sure one can exist without the other.

[Teaser]

9. actually, they don't.

only a few Greeks disagree. Mainly rich ones. The great bulk of the Greek population agrees with Galbraith on this, hence their street protests at the imposed austerity measures.

[peaches2003]

5. Conservatives never used to worry about deficits

When I went to MBA school, at a univ with a conservative business school, all we ever were taught was "deficits don't matter". They are compensated for with interest rates. However, now that they can blame deficits on Obama, all you hear from these same economists is that the sky is falling. It's all politics.

[dkf]

7. I guess we can cut taxes too then.

Looks like George Bush was right?

Is it only the federal government that can operate this way or do we prescribe this way of life for the average Joe? Personally I think this guy is in lala land. We are able to run a deficit because we are currently the worlds superpower. When that changes to China we are soooo screwed.