Mike the Mad Biologist

We Are Worrying About the Wrong Deficit

Posted by Mike on July 15, 2011
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We should be worrying about the employment deficit. Instead, we are worried about the budget deficit. But I’m getting ahead of myself. Nate Silver has a very good post detailing how the Republicans in Congress have positioned themselves to the right of….everybody. But what struck me is that nowhere in the poll would one have even been given the option of responding that the budget deficit is not a serious problem (really, look it up. You can’t answer that).

I want to nip one common complaint in the bud: if our GDP-debt ratio soars, no one will buy our debt (T-bills). This is empirically silly. Japan currently has a GDP-debt ratio (~225% vs. ~90%) more than twice that of the U.S., and still has very low interest rates. Clearly, selling Japanese debt isn’t an issue. To put this in perspective, for the U.S. to reach that level, we would have to increase our debt by $15 trillion–the size of the entire U.S. economy. No one is talking about that. We wouldn’t even notice it if we increased the debt by a couple of trillion dollars. Actually, that’s not true, since the people who would have jobs due to deficit spending, the people who would earn more money selling things to those people with newfound jobs, and those whose salaries would increase due to better bargaining conditions for workers would experience a noticeable improvement in their lives. But the amounts we’re talking about pale in comparison to $15 trillion dollars.

I’ve laid out other reasons why I don’t worry about budget deficits per se* (as opposed to the policy and economic effects of budget reduction and deficits) elsewhere, but the implications of believing in budget deficit reduction über alles are vicious: millions, including children, are thrust into (or kept in) poverty, with all of the effects of poverty, such as educational failure.

And this deficit mania also affects science budgets: as long as the frame exists that we have to artificially constrain or cut research budgets due to deficit concerns (as opposed to whether we should be funding that research–which is legitimate), research funding will be in a perpetual defensive crouch.

That might matter to some ScienceBlogs readers.

It would be nice if we understood that newfangled technology known as fiat currency….

Related: We see that Peter Dorman has similar thoughts about the ridiculousness of worrying about budget deficits right now.

*I actually don’t worry very much about GDP-debt ratios until they reach the straining credulity level, which as I noted hasn’t happened yet in Japan and doesn’t seem likely in the foreseeable future.

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Comments

  1. #1 Remo
    July 15, 2011

    Good point.

    Earlier this year I was listening to an economics forum on the deficit that included a former head of the CBO. The general consensus was the current deficit was roughly caused 40% by GWBush, 40% by the super-recession, and 20% by other factors, including Obama’s stimulus.

    All the panelists agreed that in the long-term Social Security would have to be tweaked a little, but not too much. They all were, however, deeply concerned about the long-term projections for Medicare.

    What Americans, as a whole, fail to realize is that a large portion of our deficit is non-structural: In other words temporary–once we work our way out of this recession, that portion of the deficit goes away. Moreover, if the Bush tax cuts are not renewed in two years, we don’t have too much to worry about in the short-term.

    To reiterate your point, the employment deficit is more important than the budget deficit in fixing the economy and improving the ratio of debt to GDP

    In the long-term we will need to get health care cost under control. In my opinion, at least, Obama made a start, but it is not enough. The health care market is dysfunctional and eats up too much of our GDP based on the services provided. (I’ll not go into the whys and hows, just that we spend twice as much as similar countries for the same amount of care).

    Let me give you some other deficits that are of equal importance to the budget deficit:

    1. Education deficit: We need an educated populace to increase our wealth (and pay taxes thus lower the deficit).

    2 Infrastructure: A good efficient infrastructure greases the economy and makes it more efficient. This includes transportation, electric grid, and internet.

    3. Social Services: Providing the right services increases the productive of the work force. Free market economics is actually based on cooperation and consent.

    4. Energy supply deficit/Getting off of oil: Last year, did we spend more money buying trinkets from China or oil from OPEC, et al?

    Taxes are the price of civilization. We need to invest in the future not be “penny wise, pound foolish”.

  2. #2 sailor
    July 18, 2011

    Don’t you know you are supposed to live within your means and thus spiral downwards into ever great unemployment?

  3. #3 o1
    July 23, 2011

    un and under employment are lost general productivity.
    a good part of recent annual deficits, especially state deficits, is caused by drops in tax revenue.
    so we’re more likely to ‘employ ourselves out of debt’, faster than ‘cutting ourselves into employment’.

    the tgabbers know this.