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Home Publications Blogs Beat the Press Millions of Children are Growing Up With Unemployed Parents Because of Fix the Debt and Other Deficit Hawks

Millions of Children are Growing Up With Unemployed Parents Because of Fix the Debt and Other Deficit Hawks

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Tuesday, 12 February 2013 08:03

While a Washington Post piece gave extensive coverage to the Post's favorite deficit hawks in a piece on the budget deficit, it did not include anyone who could present the basic economic facts to readers. The reason the deficit expanded from just a bit more than 1.0 percent of GDP in 2007 to more than 10 percent of GDP in 2009 and 2010 was that the economy plunged following the collapse of the housing bubble. The deficit was and is filling in a demand gap in the private sector as a result of this collapse.

The fact that deficit hawks would not allow the government to spend more money is keeping the economy from returning to full employment. As a result, close to 9 million people are out of work who would be employed if the economy were operating near its potential. This is forcing millions of children to grow up in families with one or both parents unemployed. It would have been helpful if the Post had presented the view of someone familiar with basic economics who could have reminded readers of these facts.

It also would have been helpful to include the views of someone who could have ridiculed the obsession with a debt to GDP number. When interest rates rise, as the Congressional Budget Office projects, the price of the long-term debt that we are issuing today (e.g. 10-year and 30-year bonds) will plummet. This means that the government could buy these bonds back at sharp discount rates eliminating trillions of dollars in debt. (For example, a 30-year bond issued with a 2.75 percent interest rate last year, would sell for less than 60 cents on the dollar in 2016 if the interest rate has risen to 6.0 percent. This would mean that if we bought back 30-year bonds with a face value of $2 trillion, it would only cost us $1.2 trillion. This would instantly eliminate $800 billion in debt, lowering our debt to GDP ratio by roughly 5 percentage points.)

This move would be completely pointless since it would not change our interest burden at all. But since Washington budget wonks seem to think the debt to GDP ratio is hugely important, it would be a very simple and costless way to make them all very happy. It would have been useful for the Post to note this so that its readers would realize that the budget debate in Washington is pretty much complete nonsense from an economic standpoint.

Comments (6)Add Comment
deficit not filling in demand gap...
written by pete, February 12, 2013 10:17
How come macro economists don't understand macro economics. For government to demand it must spend on goods and services. Most of the deficit is driven by an increase in transfers, and tax reductions. These do not necessarily increase demand. There has been little in the way of new spending on goods and services. Indeed, with defense winding down, likely real spending on goods and services will be plummeting.

This is what is horribly wrong with the deficit fixation. There is no cost to funding transfers with deficit spending, per se. It is real spending on stuff which has the potential to "crowd out" when the economy is at some sort of full employment, which is far from where we are.

Regarding the yield curve movements...indeed, if rates rise, the treasury could issue higher yielding debt to buy back the lower yielding debt...which will help in the short run...then hurt in the long run with the higher interest payments.
...
written by watermelonpunch, February 12, 2013 11:02
What I wonder is what exactly a lot of these people are advocating for, in advocating against the things they so fervently advocate against.
Pete's point
written by David, February 12, 2013 4:54
Rather than filling a demand gap, the government is subsidizing labor for the private sector by attempting to keep the labor supply around (food, minimal healthcare, and maybe even shelter or clothing). The subsidies do somewhat lessen the blow of the loss of demand, but hardly fills the gap that was created. This is why we are not experiencing all of 1930 all over again. But the GOP and businessmen keep putting forth the same conceptual mistakes that worsened the stock market collapse into a full blown depression.

Obama needs to pull an FDR and demand goods and services spending for the short term. Maybe gun control is going to be the sacrificial lamb, sacrificed to the Deficit Demigods, that makes employment recovery possible.
Fix the Debt
written by Carpenter Joe, February 12, 2013 8:05
Judy Woodruff, on the pbs newshour this evening, replied to a statement by Jay Carney, "But Fix The Debt, a bipartisan organization..." The newshour drank the koolaid.
...
written by urban legend, February 13, 2013 12:48
It's time to retire the term "deficit hawks." It allows them to bask in the pride in being likened to strong, tough, determined birds of prey. Our national symbol of strength is a hawk, for cryin' out loud.

How about "the job killers who love to crow about being so-called 'deficit hawks'"? How about calling them "deficit sheep"? Most of them are sheep, because they mostly are not economists and they are simply following blindly others who aren't economists themselves, either, but happen to be very rich or have other important jobs. The ones who are very rich get to pretend they know what they are talking about. The ones who are ex-generals get taken seriously even when it should be obvious to an 8th grader they have no idea what they are talking about. When was the last time Dean or Krugman tried to lecture the generals on military strategy? They are sheep because they are cowards, and calling them "hawks" hides that.

How about "deficit Puritans"? Everybody hates being called a "Puritan" even when they are.

We need terms that start to draw blood, that make weak-willed Beltway journalists and politicians want to distance themselves from being saddled with being known as "job killers." Progressives and Democrats generally are terrible at framing. It takes work to do it right. Adopting without thought bad imagery like "deficit hawks" or high-falutin words that only wonks understand like "austerity" and "stimulus" shows we have been too lazy to do that work.
Article Ignores Who Owns the Bonds
written by James Matusiak, February 13, 2013 11:15
This article only looks at one side of the equation. While the government would see a market value benefit of rising interest rates the article ignores who is hurt during this zero sum game. The Fed currently owns the majority or long dated bonds. Also the social security trust funds assets list a large amount of govt bonds as assets. So if interest rates rise, the Fed takes the hit along with social security. The financial alchemy proposed here would get a private sector financial professional at the very least fired, at the most indicted.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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