At least, deficits don’t matter when unemployment is teetering on the brink of 10%, and when government debt is actually cheaper than cash.
The chart is from Karl Smith, who writes:
Suppose the government had two choices. It could either pay for infrastructure improvements as it went along out of tax revenue or it could borrow money build the infrastructure now and then repay the money with tax revenues.
Ordinarily the question would be, does the advantage of building quickly outweigh the cost of the interest.
However, right now the interest cost is negative. The government saves money by borrowing now rather than waiting and paying cash. Let me say again because I have noticed that this goes against so much intuition that its hard for many people to wrap around when I first say it.
The government will wind up paying more if it decides to pay cash for a project than it will if it decides to borrow. This is irrespective of the return on the project itself or the advantages of avoiding delays or anything like that. It is simply that the cost of borrowing is negative.
As Alex Knapp notes the deficit really is a long-term problem. It just isn’t a problem right now and focusing on it is a cynical political ploy that is helping nobody but the cynical politicians exploiting it. The markets are spooked, the credit rating agencies are grumbling, and people remain very much unemployed.
I got into an argument back in 2000 or 2001 (pre-9/11) about the Bush tax refund where everybody got a check for 300 bucks in the middle of the year.
The person on the left with whom I was arguing was arguing that this was money that would be better off being spent on reducing the debt.
I AGREED WHOLEHEARTEDLY WITH THIS PERSON.
The problem was, I argued, that the choice was not between reducing the debt with this money and sending checks to the American People, but between sending checks to the American People and the government using the money to… do something. Something else.
I maintained that the money would be better off in the hands of The People than in the hands of some bureaucrat who would inevitably waste it on power point slides extolling the virtues of free false teeth or something similarly wasteful.
She maintained that the money would be better off paying down the debt.
All that to say: To borrow the money and use it to kick start the economy sounds swell.
Is that option on the table?
I don’t think it is on the table, but it should be.
Let’s assume, for the sake of argument, that it is not on the table despite the fact that it should be.
Then what?
Don’t remove billions of dollars from the economy and add tens of thousands to the unemployment rolls? Because that’s what any of the ‘deals’ currently on the table do.
With the current wacko Republican Congress, Obama’s main job should be don’t make things worse if possible.
Is *THAT* on the table?
Because it sort of looks to me like there’s a lot more “Ca$h 4 Clunkers” and “Qualitative Easements” kinda plans out there than plans that don’t do the things that you want them to not do.
The problem was, I argued, that the choice was not between reducing the debt with this money and sending checks to the American People, but between sending checks to the American People and the government using the money to… do something.
Because the tax cuts caused any spending that would otherwise have taken place not to be? I don’t see it, myself.
I am saying that if the money that was sent out (I believe it was sold as a “tax rebate” rather than a “tax cut”) and given to everybody as was instead given to Congress to pour into the debt, that Congress would have found other things to pour the money into than the debt.
Now, when it comes to the point that there isn’t a *SINGLE* program that was cut (or evidence that something was not done) because of this money, you’re absolutely right.
But, at that point, we’re stuck not between discussing whether the money would be best used to pour it into the debt vs. better used to give to people who had paid taxes that year but between giving to people who had paid taxes that year and not doing anything of the sort.
Unfortunately, I don’t know whether we can say if the $300 windfall created anything for the economy because, I think, it was June or July in 2001 when we got our checks and there were enough black swans in September to make measurements meaningless.
between giving to people who had paid taxes that year and not doing anything of the sort.
Right. Which amounts to lowering the deficit by the amount that was paid out.
If the economy was stimulated to the point that there were multipliers, the government would have made money off of the deal given the additional funds brought in via taxation.
Though I don’t know that we had opportunity to measure whether such a thing actually happened, given the way the year turned out.
I’m definitely a deficit hawk, to the point where I think your government is basically doomed. But I don’t see that doom coming for about 20-30 years. It’s not going to do any harm if it’s another year to 18 months before the slow austerity begins.
So I agree with you, there’s no reason to force the issue now.
Deficits do matter. A lot. They should be run at large sizes when there is as much idle capacity and lagging demand in an economy as there is in ours. Especially in deleveraging cycles when private actors and even sub-national public ones are either mired in debt and unwilling or to take on more, or unable to gain access to the credit, to finance spending, or else simply are unable to spend beyond revenues (such as state and local governments).
Fair enough, Dr. Keynes, but at the same time, surplusses must be used during times of plenty to pay down the debts accumulated during the times of economic inactivity. If this is not done, the result is a combination of a too-heavy amount of public expenditures being spent on interest to service the accumulated debt, and inflation (which, admittedly, has the silver lining of making it easier to service debt, but that silver lining comes with a dark cloud of degraded demand for the industrial and service sectors of the economy).
Yeah, Kenyesianism is *hard*.
How come running deficits by increasing spending is Kenyesianism, but running deficits by cutting taxes is good old real American common sense?
That only works if the bond markets aren’t expecting the inflation. If they are, they’ll just raise your interest rates to compensate.