Worst-of-both-worlds fiscal policy
A lot of the debate over deficits right now comes down to how you feel about interest rates. Normally, interest rates should be a conversation-ending indicator. If our deficits are too high, interest rates on government debt should be high, too, as that's how the market would compensate for the risk that we won't pay people back. But interest rates, of course, are very low. Even historically low. That should mean that our deficits aren't a problem, at least not in the short term. That's the stance taken by Paul Krugman and Brad DeLong.
But these are abnormal times, and some people think that our low interest rates are a product of, in the first case, catastrophes everywhere else, and in the second case, the fact that the market is staffed by idiots who miss important information for a long time and then all panic about it at once (remember the subprime crisis?). Rather than showing us that we don't have a problem, our low interest rates, according to this school of thought, are masking the fact that we do -- and making the eventual reckoning worse.
I don't have too much of a dog in this fight. I mainly think it's unrelated to the question of whether we added $100 billion in stimulus over the next year. The market may be dumb, but it's not completely insane. The government has about $12 trillion in total debt right now. And that, on its own, is actually okay: It's the rapid growth of entitlements in the future that poses the real problem. Amid all that, a single-year charge of $100 billion is such a vanishingly small addition to our long-term debt that neither including it nor deleting it is going to have any effect on our fiscal condition.
Moreover, I've now been to enough deficit panels and workshops to know that everyone who studies this stuff thinks that the only way we'll actually make any substantial changes to our long-term policies is within the context of a crisis. So in practice, I wonder how much this debate matters in terms of long-term fixes -- the ones that matter -- as opposed to short-term stimulus. Creating a lot of uncertainty about our deficit might be enough to push people away from stimulus, but it seems far from enough to do anything about our long-term deficit.
It seems we're getting the worst of both worlds: The argument over deficits is keeping us from doing what we need to do to help the economy grow right now, but it isn't going to be enough to get us to do what we need to do to help the economy grow later, either. And the outcome of that could be ugly: If growth is anemic when the eventual fiscal crisis does come, that's going to make a response much, much harder.
Graph credit: Committee for a Responsible Federal Budget.
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