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  • Deficits

    Posted by Ginny on September 7th, 2004 (All posts by )

    What is an economist’s perspective on Steve Verdon’s “Record Deficit”? (Thanks to Instapundit.) What kind of context do we need for the budget information and what kind of context to understand Verdon? Given the nature of this war (clearly different from WWII), is Verdon’s point useful or irrelevant?

     

    8 Responses to “Deficits”

    1. Jonathan Says:

      I don’t know what an economist would say. Verdon’s points are that the current federal budget deficit isn’t unprecedentedly large, and that journalists who pretend that it is are incompetent. Makes sense to me on both counts.

      Assertions about the relationship between government deficits and high interest rates (and other supposed economic ills) keep getting thrown around despite a lack of evidence. It reminds me of the way in which activists repeatedly assert a relationship between TV and movie violence and supposed social ills. The press will usually treat any assertion that reinforces its beliefs as valid, despite lack of evidence or even the presence of contrary evidence, so long as that assertion has been repeated publicly enough times so that the journalists who repeat it can’t be blamed for making it up.

      A lot of financial journalists show less interest in facts than do the people who write movie-star gossip columns. You can’t be sued for making false statements about government deficits.

    2. Sylvain Galineau Says:

      Verdon is right. The current deficit is not a record, once you adjust for inflation and state deficit as a percentage of GDP.

      After all, one would think the exact amount of a deficit is irrelevant without a minimum of context i.e. at a minimum, compared to how much revenue ? If I run a personal deficit of $10,000 this month due to an unexpected emergency, I think we agree the difficulty of my situation is very different if I make $3,000/month or if I make $20,000.

      Once people make statements using absolute amounts, always look for the missing part. There always is one. Also pay attention when a specific date, or a range, are cherry-picked. There is usually a reason for that too.

    3. Lex Says:

      “as a percentage of GDP” — that is the best gauge to get an idea if the “massive” deficit is really all that big.

      Of course, in a recession deficits appear or increase because more demands are made on government at the same time that revenue falls. So, the question of how big a deficit is should also be looked at in context of what the underlying economy is doing.

      On the political side, Democratic orthodoxy from Franklin Roosevelt until the Reagan era was that deficits were good — you were supposed to run them as a countercyclical demand stimulus during a recession. They won elections when they believed this. Then, during the Reagan era they started talking about balanced budgets even during a recession, not for any intellectually coherent reason, but as a way to push for tax increases and as a way to attack Reagan. The Democrats had switched sides and adopted the position of Herbert Hoover. They have been losing elections ever since. Coincidence?

    4. Jonathan Says:

      What really matters is the per capita level of government spending. Deficits don’t change that. At most they indicate the degree to which govt pays for spending by borrowing or inflating as opposed to direct taxation. Large deficits may be politically helpful to the extent that they discourage govt spending. A balanced budget may mean that tax rates are too high. A surplus may indicate, as during the 1990s, that too much cash is being diverted wastefully from the private sector, to retire low-interest govt debt, while highly productive private businesses scramble for capital. Much mischief is done by politicians in the name of deficit reduction. Voters would do better to ignore entirely the issue of deficits, and to focus instead on the per capita level of govt spending.

    5. Robert Schwartz Says:

      Lex: The Dem change of heart on deficits is the result of becoming a minority party not a cause. The party in power will always favor deficits. Its fun to spend money. The party out of power will always complain about them. It gives them something to complain about.

    6. Lex Says:

      Robert, it is a little more complicated. Democrats liked deficits when they led to constantly increasing governement expenditures and new programs and permanently high rates of taxation. Reagan changed the logic. He cut taxes, and increased military spending. So in recent years deficits have been associated with decreased or at least not expanding domestic programs and lower taxes. This was a positive step, and it is not really just more of the same.

    7. Richard A. Heddleson Says:

      Unfortuantely W is not a Reagan Republican and has a war on his hands.

    8. Sandy P Says:

      We didn’t have a war on our hands when Ronnie was pres?

      Not a hot war, just some warm front and a big old cold one.