How You Can Tell When the Deficit is a Problem

[Alan Grayson]

A few days ago, I was stuck in the car for a long drive. Because of the complete absence of progressive talk from Orlando's airwaves, I had no real choice but to listen to the nasal maundering of Mark Levin on the radio. Levin was very upset about the federal deficit.

Interestingly, Levin was a high-level appointee in the Reagan Administration. Dick Cheney, who was Reagan's Defense Secretary and later the Vice President, said 10 years ago that "Reagan proved deficits don't matter."

I must concede that it is rather difficult to reconcile the conflicting statements of these two gentlemen, Messrs. Levin and Cheney. Evidently, they believe deficits are a terrible tragedy when a Democrat is President, and a wonderful gift when a Republican is President.

There has got to be a more objective standard than that.

Here's one: the federal deficit is a problem when long-term interest rates are high, and not much of a problem when long-term interest rates are low. The Federal Reserve dictates short-term interest rates, but long-term rates still are, pretty much, set by the market, in its usual ruthless fashion. (Which is why James Carville said that after he dies, he "want[s] to come back as the bond market. You can intimidate everybody.&quot

When long-term interest rates are high, a federal deficit competes against and "crowds out" private borrowing and investment. When long-term interest rates are low, the federal deficit is not taking away from borrowing by the private sector. On the contrary, the federal deficit is acting as a needed boost to aggregate demand in the economy, an action also known as "fiscal policy." When the economy is slack, every dollar of reduction in federal spending takes three or four dollars off of our gross national product.

So, by that test, where are we? Well, as I explained last week, long-term U.S. interest rates are at their lowest in history. So what does that tell you about the deficit?

Sorry – I didn't mention that there was going to be a quiz.

When Ronald Reagan was President, long-term interest rates sometimes exceeded 15% – ten times as high as long-term interest rates today. The market was screaming at the top of its lungs that the Reagan deficit was too high. And today? Silence.

Look around the world. The ten-year note in Greece yields a little less than 30%. Pakistan, 13%. Portugal and Venezuela, 12%. In those countries, the bond market is shouting, "Cut that out!"

Not here.

Thanks to all the deficit-mongering by Mark Levin, Rush Limbaugh, Fox "News," etc., a lot of Americans are scared by the federal deficit. The advice from Democratic pollsters is to go along with this hand-wringing. But there is an alternative: Explain to the American people when a federal deficit is bad, and when it is not.

Like I just did.

Courage,

Alan Grayson

[cbrer]

1. When it's a deficit in MY house!

Seriously, you are then suggesting that it's a current problem that we shouldn't worry too much about?

May I suggest sir, that there are more issues attached to the deficit than the bond market. Not the least of which is that the things we're going into debt for, do not have a positive impact on humanity for the most part. Then there's the notion that politicians can just keep borrowing, and we should just think about it in local, time constrained terms?

This is not a simple subject that is reliably dissected in a 5 paragraph post. But for the present, we evidently won't be crushed by this years overages.

[bongbong]

3. The Free Market!

The Free Market says the deficit is not a problem under a Democratic president & a Democratic Senate.

Watch interest rates zoom skyward if a repig takes power or takes the Senate, just like they did in the past.

repigs are gigantic, documented-from-history failures with the economy.

[A Simple Game]

8. Of course interest rates will go up if a Republican becomes President.

It's planned. They can complain about the deficit which allows them to cut safety net programs and they then buy long term bonds to reap the windfall from high interest rates they caused. Win win for them.

Don't listen to what a Republican says about deficits, watch what they do with the deficits. They never seem to be able to cut them but can do a lot to increase them. They are willing to kill thousands to keep the deficit high all in the name of patriotism.

[MrModerate]

7. I think everybody has a list of things the government shouldn't be doing . . .

Pointless wars topping mine.

And I don't think Grayson's point is that deficits really don't matter, in a simpleminded, Reaganesque way, but that for them to have assumed such huge importance in the electorate's mind is contrafactual.

Frankly, the left has been outmaneuvered on this issue, to the extent that even people who know better feel compelled to at least express concern over deficits when the real issues that government can have positive impact on are jobs and stimulus.

[freshwest]

2. Thanks a million. Keep it up.

[dkf]

4. The problem is that sentiment can turn on a dime and we have a significant % of bonds maturing soon

NEW YORK (Reuters) - Insatiable demand for safe haven U.S. government bonds is helping mask a potentially huge financial problem -- the need to extend the maturity of debt issued by the United States.

The United States has the least balanced maturity schedule of any major nation. Over 70 percent of its bonds mature within 5 years, compared with an average 49 percent for the 34 member countries in the OECD.

This leaves the country extremely vulnerable to any shift in investor sentiment at a time when its debt load has almost doubled in four years.

Marketable U.S. debt has risen to over $9 trillion, from around $5 trillion in late 2007, before the government increased spending to bail out struggling financial companies.

If sentiment were to shift quickly, it could send the cost of refinancing the country's bonds sharply higher. This would, in turn, eat into its budget and ability to meet long term obligations.

http://mobile.reuters.com/article/idUSTRE7803QD20110901?irpc=932

[phantom power]

5. Dems have done a terrible job explaining how macro-economics differs from household economics.

Until you explain that, things like Depressionary economics, Liquidity traps, and Keynesian economic policy solutions don't really make sense, and we are defenseless against demagoguing about "running the govt like you run your house"

[rhett o rick]

6. And courage to you my friend. nm

[JDPriestly]

9. A must read. Wish I could recommend this a thousand times.

[MrTwister]

10. Brilliant analysis.

Can't wait to point that out to the wing-nuts I know, heh.

[Peaceful Protester]

11. What Republicans don't want you to know is:

Economist Mike Kimel notes that the five former Democratic Presidents (Clinton, Carter, Johnson, Kennedy, and Truman) all reduced public debt as a share of GDP, while the last four Republican Presidents (H. Bush, G. Bush, Reagan, and Ford) all oversaw an increase in the country's indebtedness.

[Rosa Luxemburg]

12. If they had stopped war funding then there wouldn't be a deficit