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Home Publications Blogs Beat the Press The Budget Deficit and the Mysterious Forces That Determine Newspaper Headlines

The Budget Deficit and the Mysterious Forces That Determine Newspaper Headlines

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Wednesday, 26 September 2012 05:05

The NYT notes that the deficit is likely to surpass $1 trillion for the fourth consecutive year. It then tells readers:

"Against that headline-grabbing figure, Mr. Obama’s explanation — that the deficit he inherited is actually on a path to be cut in half just a year later than he promised, measured as a percentage of the economy’s total output — risks sounding professorial at best."

Many people might have thought that newspapers control what goes into their headlines (the headline of this piece is "Obama faces test as deficit stays above $1 trillion). This should mean that they have the ability to write their headlines and articles in ways that best convey information to readers, not fan fears that are promoted by partisans of a particular course of action (i.e. deficit reduction). This means that if President Obama's explanation for the deficit is valid (it is), then it is the responsibility of the paper to explain it to readers in a way that is understandable to them.

The piece notes projected increases in the ratio of debt to GDP. It then tells readers:

"Many analysts say that a nation’s debt should not exceed 60 percent to 70 percent."

While it does not identify these analysts, they are obviously people who are ill-informed about budget accounting. If we are only concerned about the ratio of debt to GDP, then the Treasury will be able to buy back long-term debt issued today at very low interest rates at a substantial discount if interest rates rise back to more normal levels as predicted by the Congressional Budget Office and others.

A 30-year bond issued at a 2.75 percent interest rate, would sell at a 40 percent discount if the long-term interest rate rose to a more normal 6.0 percent. This means that if the Treasury had $4 trillion in 30-year bonds outstanding, it would be able to buy them back for 2.4 billion, instantly eliminating $1.6 trillion in debt or roughly 10 percentage points of GDP.

This would of course be silly, the interest burden would not have changed, but budget analysts who think that a nation’s debt should not exceed 60 percent to 70 percent would be made very happy by this action. In reality what matters is the ratio of interest payments to GDP, which is now near a post-World War II low. Remarkably, this fact is never mentioned in this piece. 

 

Comments (9)Add Comment
MSM Headlines Discovered as Based in Google Search Algorthm
written by Last Mover, September 26, 2012 6:44
Mysterious Forces That Determine Newspaper Headlines


"Many analysts say that a nation’s debt should not exceed 60 percent to 70 percent."


No need for individual primary or secondary sources anymore by MSM. Just say what others say on most frequently occuring basis to be safe from risks and avoid the crazies, which is of course how MSM comes to represent crazies themselves.
...
written by Matt, September 26, 2012 9:50
This would of course be silly, the interest burden would not have changed, but budget analysts who think that a nation’s debt should not exceed 60 percent to 70 percent would be made very happy by this action. In reality what matters is the ratio of interest payments to GDP, which is now near a post-World War II low. Remarkably, this fact is never mentioned in this piece.

A quick search reveals that the CBO recently released a report that predicts interest payments soaring over the next decade. I see that it assumes an extension of the Bush tax cuts, but I'd still be interested to get your take on it, Dr. Baker.
debt, government spending, interest...
written by pete, September 26, 2012 12:37
unless investors/taxpayers are irrational, debt should not affect interest rates. most government "spending" is just transfers, i.e., robbing from Dean to pay Pete. or is it peter and paul. Real government spending (on goods and services) is expected to decline, hopefully defense? And if the health care panel can get doctors and nurses to take real cuts in pay, even health spending should not rise too much. With little growth in government spending, no drain on the economy, no rise in interest.

Bottom line, interest should remain low even if debt skyrockets just to pay SS checks and unemployment...no real effect, just transfers.
I don't think
written by joe, September 26, 2012 1:40
I don't think Dean understands yet that the US doesn't really borrow, it's the issuer of the currency. The govt had to first issue the dollars before anyone could buy a treasury bond. I know Dean understands national income accounting, but does he realize its implications, that if the non-govt sector wants to take the surplus position, then the federal govt MUST take the deficit position? Every deficit in the system is matched by a surplus. Surely he knows this, but yet fails to grasp what it really means.

Only a "loser liberal" would respond to deficit talk by talking about low interest rates. A strong liberal would pound home that the govt deficit is the private sector's surplus and the "national debt" is the net savings of the private sector. It doesn't get 'paid back', in the normal sense of the words. The pundit world has no clue at all that its impossible for all sectors of the economy to simultaneous earn more than they spend.

the deficit
written by mel in oregon, September 26, 2012 2:03
often unmentioned in the corporate press is that the deficit became so high because of wealthy tax cuts, the two wars, the interest free loans to wallstreet, the bailouts, & quantative easing. also unmentioned is that business debt, particularly financial debt is higher than federal, state & consumer debt all put together. so wallstreet banks & financial institutions with their unrestrained speculation are responsible for the economic meltdown 100%. yet according to our government wallstreet toadies, it's all granny's fault.
...
written by JSeydl, September 26, 2012 2:05
joe, I don't see how what you wrote contradicts Dean's post. His point is that the interest burden is very low right now. This means that, if anything, the government should be borrowing and spending more to support the economy. Over the longer term, we shouldn't expect the private sector to be a net saver -- and indeed we wouldn't even want that outcome, because productivity growth would stall. This is why it's imperative that the trade deficit narrows, so that the government can eventually reduce its deficits. The thinking, obviously, is that if the dollar does fall and growth picks up, then the private sector will eventually spend money again.

Would you like the government to run deficits forever? if so, why?
Hey joe, where you goin' with that opinion in your head?
written by David, September 26, 2012 4:58
joe, if you read Dean's posts more regularly, he obviously understands the basic accounting principle you mention, and what it means. Not sure what you're trying to say.

What I do notice is that you talk about deficit spending, but Dean is talking about debt. Deficit and debt aren't the exactly same thing, though they are related. You know that, right? Conflating the two can lead to confusion.
Timberland Boots
written by ann, September 26, 2012 10:07
Secondly, you get to work blind ounce, the selection and variety of Timberland Boots absolutely pale in comparison. However, buying boots online give you a lot of options. You can find different material, size and color that you like. To find a rare color or a special design, it will be difficult to obtain in stores work. Instead, you can certainly get a pair that you online.

http://www.shoestimberlandstore.com
...
written by Calgacus, September 26, 2012 11:25
Mel: Right. There's a difference between Good Deficits & Bad Deficits. (Terminology of Alain Parguez, et al.) Good Deficits - New Deal deficits - e.g. paying granny what she is owed, what she worked for, get a tremendous bang for the buck, cause so much productive activity it is hard to not have them taxed away quickly. The other kind, Bad Deficits, like you list, might need to be enormous to do near as much good.

Jseydl: Over the longer term, we shouldn't expect the private sector to be a net saver -- and indeed we wouldn't even want that outcome, because productivity growth would stall.

Huh? Over the long term, the private sector is always a net saver, that's what the national debt, which basically always grows, is. How on earth would that mean productivity growth would stall? Grosso modo, productivity growth & population increase is what lets the national debt grow (in real terms). It is the unnatural stifling of (good) deficits that stalls productivity growth, not the reverse.

This is why it's imperative that the trade deficit narrows, so that the government can eventually reduce its deficits. It's not imperative, or a Good Thing, that the trade deficit narrow, nor is the goal of reducing deficits a sensible one. It might be an effect of rational policy - moving from big Bad Deficts to smaller Good ones. Dean, IMHO argues wrongly for currency weakening & against trade deficits, but he usually notes in the background that the government can accomodate by budget deficits.

Would you like the government to run deficits forever? if so, why? It's not something that people do or should like or even care about. It is just a consequence of economic growth, and the way it has worked for millennia. Deficits are the sustainable norm, while surpluses and balanced budgets are the unsustainable exception.

David: Both Dean & Joe talk about deficits & debt. I would speak a bit differently from Joe; One could say the government does "borrow" and it does get paid back - but its spending is the borrowing, its taxation the payback. While the "borrowing" is done entirely to confuse people.

I think Joe's problem is that while the whole import of the article is Dean's accurate satirization of silly newspaper beliefs about the debt ratio, the government is still presented as passive accepter of interest rates (set by the omnipotent Mr. Bond Market?) when in reality, the government determines the interest rates it will pay on its bonds. It may determine them in an idiotic way, like auctioning off a set quantity & letting people decide how much they value the various maturities at in its MZM terms, but that is still the government deciding. Perhaps Dean's framing is a necessary intermediate step in deprogramming from the Moonie cult of Mainstream theory. But Joe is right that the pundit world is completely insane & thinks that the private (nongov) sector & the gov sector both financially net saving is possible.

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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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