Ezra Klein: Galbraith: The Danger Posed by the Deficit 'Is Zero'

flpoljunkie

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Thu May-13-10 07:36 AM
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Ezra Klein: Galbraith: The Danger Posed by the Deficit 'Is Zero'

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?

more...

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

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Skinner ADMIN

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Thu May-13-10 08:42 AM
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1. Interesting (and confusing) stuff.

It sounds almost too good to be true. This part, from the end of the interview really stands out to me...

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 would encourage people to click the link above and read the entire thing.

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Kurt_and_Hunter

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Thu May-13-10 09:30 AM
Response to Reply #1

4. I think most modern economies run a systemic deficit on purpose

Edited on Thu May-13-10 09:43 AM by Kurt_and_Hunter

A (long-term) balanced budget is not much more optimal than 0% inflation.

Modern economies are built around growth and that has counter-intuitive implications.

There are limits, of course. A state can borrow enough that it poses problems, but some level of deficit spending turns out to be the right answer for an entity that 1) prints its own money, 2) finances debt at the most favorable borrowing rates in the world, 3) gains revenue in proportion to economic growth and 4) has no plans to ever retire, or even to ever die.

Kitchen table economics do not apply to such an entity.

Since we have a continual-growth model and no plans to die as a nation there is no reason to balance the budget. If the economy grows at 3%/year and the federal government spends 3% more than it takes in every year is actually works out fine. The government is one year ahead of the economy, helping pull it forward. Forever. Essentially, always carrying a modest balance on a credit card that only charges 3-4%. (Our real borrowing cost is treasury bill rates *minus inflation* so in effect it's even smaller an interest burden.)

But we don't want the balance we carry to grow too much. When we hit a bad economy the system doesn't work and the deficit becomes unsustainable... until we resume growth. In a growing economy the deficit is not scary.

The way a budget usually gets closer to balance isn't so much raising taxes or cutting spending. It's economic growth. (In the 1990s we grew out of the deficit merely by slowing the annual drain enough to allow a booming economy to organically grow out of the deficit.

Question: To what degree does states having mandatory balanced budgets retard US economic growth? I don't know but it's an interesting question.

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Birthmark

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Thu May-13-10 08:48 AM
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2. Man, did that ever need to be said!

And it was said by an economist. Astonishing.

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Clio the Leo

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Thu May-13-10 08:56 AM
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3. Well, it's too bad that all of the voters aren't James Galbraith...

... because from a political perspective, the deficit is a HUGE problem.

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Donnachaidh

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Thu May-13-10 09:49 AM
Response to Reply #3

5. and we all know that all *political perspectives* are based on TRUTH

:eyes:

:rofl:

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Clio the Leo

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Thu May-13-10 10:31 AM
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7. People dont vote based upon research conducted by noted economists...

... which is a shame.

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ProSense

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Thu May-13-10 10:06 AM
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6. Doesn't that depend on its impact on the debt?

Are We Greece?

David Leonhardt tries to draw parallels. But how strong is the parallel, really?

I would really question this comparison:

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece�s debt, by comparison, equals about 115 percent of its G.D.P. today.

Um, that�s comparing a (highly uncertain) projection of debt 20 years from now � a projection that�s based on the assumption of unchanged policy � with actual debt now. Actual US federal debt is only about half that high now. And it�s worth pointing out that Greek debt is projected to rise to 149 percent of GDP over the next few years � and that�s with the austerity measures agreed with the IMF.

Here�s a more or less apples-to-apples comparison of the medium-term outlook. I�ve taken the Auerbach-Gale projections for the US budget deficit as a percentage of GDP outlook under Obama policies, and compared them with the IMF projections for Greece, subtracting out �measures� � that is, the austerity measures agreed in return for official loans. Here�s what it looks like:

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flpoljunkie

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Thu May-13-10 01:34 PM
Response to Reply #6

9. Thanks, ProSense. No, we are not Greece, either.

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robcon

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Thu May-13-10 01:11 PM
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8. There are two problems with the deficit:: risk of default and the cost of servicing the debt.

I think the debt is far too large.

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