Day By Day

Thursday, June 15, 2006

A Realistic Look at the Deficit

Some of my correspondents like to say that they are "deficit hawks." Maybe "deficit nut" might be more appropriate. They are bright people, well (one might even say over) educated. They, however, have an unfortunate obsession with the Federal deficit, the size of which they feel portends the imminent collapse of the American economy. I keep trying to tell them that they're wrong, but they refuse to listen. Maybe they will listen, though, to Jed Graham, over at IBD, who notes that

Tax revenues are running $176 billion, or 12.9%, over last year, the Treasury Department said Monday. The Congressional Budget Office said receipts have risen faster over the first eight months of fiscal '06 than in any other such period over the past 25 years — except for last year's 15.5% jump.

What that means is that the federal deficit will be cut in half three years sooner than the most optimistic projections of just a year ago.

Read it here.

Or maybe they'll listen to Megan McArdle who writes:

It is common, and silly, for people worrying about America's current account deficit to make statements like this:

If the US were a developing nation, it would have been IMFed by now.

And if I were Anna Nicole Smith, I would have absolutely ENORMOUS . . . vacation homes. This is not very relevant to my current summer plans.

Developing nations have to pay extra money to borrow because lenders think that there is a better-than-average chance that they will not pay the money back. Developing economies are more prone to sudden shocks than rich world ones; their tax collecting systems are primitive; their governments tend to have a less-than-sterling committment to international fiscal rectitude; and they are often prone to coups by people who start off their new reign by repudiating all former debts. Moreover, their central bankers tend to be political cronies who will inflate the currency whenever it is politically convenient for those in power, which is why such countries are often required to borrow in a more stable currency, to remove the temptation for heads of state to inflate their way out of inconvenient debts.

Investors are pretty confident that the United States is not going to suddenly shed 25% of its GDP because of a boll weevil infestation, or get a president who nationalises all the farmland, expels half the skilled workers in the country and kills the rest, and runs the Treasury's printing presses day and night as a way to temporarily cover up the ensuing problems. They are reasonably sure that our economy will grow at a steady, if unspectacular pace, and that we will be able to meet their debts (as they should be; both our national debt and our fiscal imbalances are relatively modest by international standards, and look especially good if you compare our long term fiscal position--where the primary driver of imbalances is social security and Medicare--to those of Europe and Japan.) Thus, they lend to us in dollars, and they lend to us at very attractive rates.

One of the reasons that the panickers neglect to mention that all these foreigners are lending us dollars is that in their judgement, the United States is the most likely economy in the world to deliver an attractive combination of growth and low risk.

That is not to say that our fiscal imbalances are not a problem: they are. Getting our fiscal house in order, on both the government and the household level, is not going to be pleasant. But it is ludicrous to talk as if we were the next Argentina.

[emphasis mine -- I might point out that they also look pretty good by historical standards]

Check out her blog here. She is one smart lady, and she makes a Hell of a lot more sense than some of my more excitable correspondents.

For deficit hysteria and stagflation fears look here and here.

Rick Moran notes that the same left-wing economists, who have been predicting imminent disaster for years, appear over and over in these articles. [here] "Why?" he asks. Because they can be relied upon for sensationalistic quotes.

For a more pessimistic view see Hale Stewart here. He notes that the talk of stagflation is keyed to recent comments by Fed Chairman Bernanke, who should be more careful of what he says in front of ignorant journalists, but thinks that there might be some substance to the worries.

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