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Posted at 2:25 PM ET, 12/ 2/2010

Three reasons to relax -- a bit -- about the deficit

By Ezra Klein

The deficit is a problem, particularly in the long term. But to listen to Alan Simpson and Erskine Bowles, you'd think it was going to eat your children. Tomorrow. Without cleaning up the mess.

There's some deficit fear-mongering going around town. Some of it is a function of partisanship: The deficit makes Obama and the Democrats look bad, and that's led a lot of people who want Obama and the Democrats to look bad to get much more excited about debt than they were in, say, the Bush years. If you want to know how seriously to take this, note that the same folks warning that the U.S. is following Greece's path to "to fiscal disaster" are trying to add $4 trillion to the deficit by extending all of the Bush tax cuts indefinitely.

But some of it is a function of legitimate concern. Simpson and Bowles are certainly in this because they're really worried about the debt. The problem is, being concerned about something means you have to get other people concerned, too. And that sometimes requires some overstatement, or at least emphasizing all the reasons for worry. But there are reasons to take heart, too. Here are three of them worth keeping in mind as this conversation moves forward:

1. The market isn't worried -- at least not yet. We worry about the deficit because high deficits create a specific problem for the American economy: high interest rates on government debt, which show that the market is worried about our ability to pay the debt back but also make it hard for both the government and the private sector to borrow. But we're not seeing high interest rates. The government can sell a 10-year bond with a 2.54 percent interest rate right now. When George W. Bush entered office, that was 5.16 percent. When Bill Clinton took charge, it was 6.6 percent. When George H.W. Bush said the oath, it was 9.09 percent.

2. We're the only game in town. The markets can turn on us, of course. After all, they've turned on us before (as you can see from the 1991 interest rate), and they're turning on Greece and Ireland now. But where are they going to go? They need to find government debt that's safer than ours. The natural choice would've been Europe, but the continent is a fiscal basket case. Japan's economy is worse than ours. And China? Riskless? You have to be kidding me. The global economy just doesn't offer conditions conducive for the market to run somewhere else.

3. Debt hasn't gone up by as much as you think. We tend to think of debt in terms of government borrowing. But not all of the country's debt comes from the government. It also comes from businesses and households. And that debt -- private debt -- has plummeted in recent years as companies and households sit on their cash rather than leverage themselves. So though it's true that public debt has risen sharply, private debt has dropped precipitously. The total amount of American debt that the global capital markets are being asked to absorb, in other words, has not changed by nearly as much as people think. A lot of what's happened is we've replaced private debt with public debt. This wouldn't matter if the government were continuing to borrow at the same rates even as the economy recovered, but it isn't.

What you'll notice with this list is that it's about the deficit in the short to medium term. For now, interest rates are low. For now, there's nowhere else for the money to go. For now, the rise in public debt has been paired with a drop in private debt. We have serious long-term problems that aren't amenable to these excuses. But that's the old story about how we need to get our health-care spending under control, and it's a story that we can resolve over a period of years or even decades -- which is exactly what all the deficit plans do in their health-care sections.

All of which is arguably reason for optimism. I don't think the chances for a big deal in the next year or two look very good. Nothing Congress does to reduce the deficit will match the damage it's going to do by extending the Bush tax cuts. But we might well see a large number of smaller deals reached in coming years -- much as we saw during the '90s (we had deficit-reduction bills in 1990, 1993, 1995 and 1997). And though you wouldn't know it from the rhetoric, that might be enough. Maybe.

By Ezra Klein  | December 2, 2010; 2:25 PM ET
 
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Comments

Ummm Ezra not to embarrass you but interest rates on the 10 year pushed over 3.00 today, a half percent higher than you stated. Yes, that is a big deal for the 10 year. The significance is that this has occurred despite the Feds QE2 program which should have led to lower or stable rates.

There is of course no comparison between historical rates, because the Fed has done this deliberately as a policy. The market is not setting these rates, Bernanke did.

There are lots of options for money to go elsewhere. Gold and other commodities have seen huge inflows as the Fed has guaranteed inflation. The Chinese in particular are lowering purchases of Treasuries which the Fed is masking so far.

Getting a simple thing like the rate on a 10 year Treasury yield seriously wrong, which you could have looked up anywhere, is just another example why you shouldn't discuss currency and debt, because you don't know anything about it.

Posted by: 54465446 | December 2, 2010 3:06 PM | Report abuse

Forgive me for being dismissive in my above post. It's just that you miss things that are so simple sometimes. I know you don't read any of the responses, but man just read or watch a business publication sometime will ya.

Anyway, I have a big bromance going with Bernanke. He and Paulson did an amazing job. In case you missed it, the numbers came out yesterday that they were actually juggling 3.3 trillion dollars in short term loans during the crisis, MUCH bigger than anybody expected. This was all done on an adhoc basis too. Anybody can disagree with what they did, if you don't accept the central premise that the system needed saving. However if you accept that, what they did was gigantic.

Now we have to see if Bernanke is going to wind up like Michael Cimino with Heaven's Gate or Francis Ford Coppola with One From The Heart, after their huge successes with The Deer Hunter and Apocalypse Now respectively.

What Bernanke is trying to do simultaneously is:

1) push the economy forward

2)devalue the currency

3) Keep Treasury rates from rising too much too fast (like the ten-year which would kill any nascent housing recovery if it moves as quickly as it has recently)

4) stabilize the Euro and European debt markets (through undercover money which won't require Congressional authority)

5)keep the Chinese in the game without a currency war.

6) push inflation, but at the same time control it from going runaway.

That is just an unimagineable agenda. The chances are that he will fail on at least two of those, but the sheer guts involved is one of those things that you HAVE to give him props for.

Posted by: 54465446 | December 2, 2010 3:37 PM | Report abuse

"The market isn't worried -- at least not yet."

The market wasn't worried about Greece a year ago. How many times does it need to be said - when the market is worried, you're already screwed.

"We're the only game in town."


That's not true.

Germany is generally perceived to be less risky than the United States, at least recently. If the U.S. is really looking shaky, money will move to China or other emerging economies that have done well as of late. It isn't that China is riskless, it's just relative value.

Failing that, there is always gold. Gold is up nearly 100% from the November '08 lows, and near a record high.

"Debt hasn't gone up by as much as you think."

Let's see. Net of TARP (high outlays in '09, net inflows in '10, and an extraordinary item if there ever was one), the deficit increased.

Moreover, private debt is different than public.

Private individuals and corporations aren't legally allowed to steal from me to pay their bills. If they borrow too much they bail (or get bailed out - so maybe they can steal from me).

What do you think would have happened in 2008 if instead of the banking crisis you had a U.S. government defaulting? Do you actually think it would have only been a mild 2.6% decline in GDP? Remember, a U.S. default means that over $1 trillion of government spending ceases almost instantly. So we could cut the defense in half, Social Security payments in half, eliminate TANF, food stamps and unemployment insurance and we'd be about there.

Posted by: justin84 | December 2, 2010 3:40 PM | Report abuse

For now, the rise in public debt has been paired with a drop in private debt.

-because we the consumer are now choosing (or are forced) to live within our means.


But that's the old story about how we need to get our health-care spending under control, and it's a story that we can resolve over a period of years or even decades -- which is exactly what all the deficit plans do in their health-care sections


--Ezra did I miss something and there was actual MEAT in the health care deficit reduction plans or just generalities because everyone out there (including you previously) stated it was just a lot of promise to look at it in the future but no actual cost reductions.

Posted by: visionbrkr | December 2, 2010 3:54 PM | Report abuse

The deficit makes Obama and the Democrats look bad, and that's led a lot of people who want Obama and the Democrats to look bad to get much more excited about debt than they were in, say, the Bush years.

Of course, that's what the party out of power always does, try to hamstring the other guy's agenda by fretting about the deficit. Then when they switch turns at the helm, then the new party out of power starts worrying about the deficit. The Republicans realize its all part of the game, the Democrats (or at least the President's team) does not.

Posted by: beowulf_ | December 3, 2010 1:55 AM | Report abuse

Yeah the deficit is a problem....so what does the stupid narcissist Congress do? they add 2-4 Trillion to the deficit with a tax cut that has not created a single job. The republicans/Bush's tax cuts had been in full force for a few years PRIOR TO THE GREAT RECESSION. What makes Congressmen think that now the Bush tax cuts are going to magically create jobs? It is pure stupidity. It is narcissism. The republicans are ONLY CONCERNED WITH THEIR IMAGE in the minds of voters, which is growing worse every day. Shallow narcissist cowards every single one of them. Their isn't a single republican that wants what is right for the USA.

Posted by: vintel7 | December 3, 2010 8:18 AM | Report abuse

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