The Budget Crisis: The Blame is Bipartisan
Truthout, November 23, 2009
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The country is being bombarded with stories claiming that record budget deficits threaten our children’s future and jeopardize the credibility of the dollar. These stories are a serious problem – they have hugely confused the public about the nature of the country’s economic crisis. And both parties share the blame.
Starting with the reality behind the scare stories – trillion dollar deficits are really huge relative to the money that any of us will ever see in our lifetime. But this is an absurd measure. The United States is a country with more than 300 million people. It doesn’t matter that a trillion dollars is a huge amount to any of us individually. What matters is the size of the deficit and the debt relative to the size of the economy.
Only people who want to deceive the public would talk about the deficit or debt in “trillions” of dollars. This is a very simple lie detector test since honest economists and policy analysts always refer to these sums relative to the size of the economy.
Relative to the size of the economy, the deficits that we are running are large and the debt that we are projected to incur is substantial, but the deficit level is still not coming close to the levels hit in World War II. Nor is the debt level projected to reach post-war peaks or the levels sustained by countries like Italy and Japan. The idea that we are near some debt-driven crisis is absurd on its face.
The United States had the strongest period of growth in its history in the three decades following World War II. This undeniable fact should put to rest the idea that our debt levels will threaten the prosperity of future generations. We hand our children a whole economy and society. If we give them a bad education, a decayed infrastructure, a ruined environment, then we will be jeopardizing our children’s economic well-being. However, the debt levels we are currently projecting aren’t even large enough to make it to the list of serious problems.
The claim that the dollar faces an imminent crisis because of the budget deficit or national debt is readily refuted by the example of Japan. Japan already has a debt to GDP level that is far larger than we are projected to have by the end of the next decade. In spite of this debt burden, investors are willing to hold 10-year Japanese government bonds at just a 1.5 percent interest rate. If these debt burdens are supposed to make Japan a high risk, someone forgot to tell the people who are putting billions of dollars on the line by holding Japanese government bonds.
There is another side of this Japan story that makes the idiocy of the deficit scare stories even more apparent. According to the deficit fear mongers, the dollar has been falling in recent months because investors are becoming increasingly worried about the U.S. government’s ability to pay off its debt. But one of the currencies that the dollar has fallen against is the yen. Are investors who are worried about the U.S. government’s ability to pay off its debt selling dollars to buy the bonds of the Japanese government, which has an even higher debt burden?
Let’s face it: the deficit hawks will say anything to advance their agenda. Even worse, the media will print it.
This deficit nonsense should have been put to rest long ago, but both parties have hyped it to advance their ends. Currently the Republicans are making headway in the polls by blaming the Obama administration for a deficit that is primarily the result of economic mismanagement during the Bush years.
But Republicans don’t have a monopoly on demagoging the deficit. During the Bush years, many Democrats spoke of the Bush deficits in cataclysmic terms. This was absurd. The deficits were larger than was desirable during part of the Bush administration (large deficits in 2002 and 2003 were helpful in boosting the economy), but they were not hugely out-of-line. There is certainly no story that can pass the laugh test in which these deficits are responsible for the collapse of the housing bubble and subsequent recession.
There were plenty of grounds to attack President Bush for the economy’s performance under his watch. Most importantly, he let an $8 trillion housing bubble grow unchecked, and giving big tax cuts to the wealthy is not the way to create an educated workforce and a modern infrastructure.
But the Democrats often hyped the deficit – it was the easiest way to score political points. That helped to give us a situation in which tens of millions of people somehow think the deficit is the cause of the economy’s problems when in reality it is the only thing keeping it afloat. In short, the Democrats are paying the price of their own political opportunism. Unfortunately, so is the rest of the country.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.