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.