Is The Deficit Really Of Concern?

While surfing the other day I came across a piece written by Megan McArdle for the Atlantic.  She had some interesting perspectives on the Deficit Blame Game.

I am a long-time believer in the notion that nobody cares about the budget deficit.  People say they care about the budget deficit, but people say they care about a lot of things.  Almost everything, in fact.  What people flogging the budget deficit actually care about is the programs it goes to pay for.  Every time the presidential party turns over, I get the pleasure of watching deficit-hawk Democrats suddenly discover that borrowing hundreds of billions of dollars actually has no moral or economic implications, especially when compared to national health care.  Meanwhile, Republican scientists who presumably spent the last eight years locked in a vault in the basement of Heritage run out into the metaphorical street screaming that they have just made a shocking, horrible, and totally unexpected new discovery:  budget deficits will make the economy melt down into a pool of manufacturing-depleted sludge, and also, cause rabies.

Economically, much of the talk about deficits is hysteria.  A budget deficit of less than 4% of GDP is not a good thing, but it rarely results in catastrophe either, because inflation and GDP growth steadily erode the value of past debt.  As long as the deficit is less than inflation + GDP growth, the government is unlikely to get into much trouble.  It’s possible that this borrowing may crowd out private borrowing, but at least over the last decade, this has obviously not been the case.

But more importantly, the deficit now is not what matters.  Any Republicans who are using it as a political tool to bash Obama should be ashamed of themselves; whatever you think of the stimulus package, one year of massive borrowing is not going to kill us, and the impact on future generations will be small.

The problem with the budget deficit is not any particular program, or even any particular tax cuts.  It is not that George Bush or Obama is a bad person who does bad things.  The problem with the budget deficit is that, unlike the deficits George Bush ran, the deficits projected under Obama (and beyond) are actually large enough to potentially precipitate a fiscal crisis.  If our interest rates suddenly spiked up, perhaps because lenders were worried about the size of our budget deficits, we’d find ourselves in the kind of nasty fiscal jam that regularly plagues third-world countries.  The difference is, no one has enough money to bail us out.

McArdle made some very fine points and should be read:

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