The more things change, the more they stay the same. We're now running a $520-plus billion dollar deficit in the federal budget. Should we care?
In times of other big deficits, the effect was higher interest rates and an undermining of economic growth. Today's deficit is about 5% of GDP, just about where it was in the early 90's. The economy appears to be growing, and treasury rates have remained low and stable since last summer (driven by a short term borrowing rate of 1%). Countries like China and Japan are practically gorging on US t-notes - albeit to create demand for US dollars to avoid their own currencies from strengthening... but it allows us to continue to buy their products at reasonable prices, and high demand for treasuries keeps their yields low. So should we care about the deficit?
Quoting Wharton finance professor Nicholas Souleles in my latest alum newsletter, "I think the deficits are large and they are worsening... So you can ask yourself, are the reasons good enough to be borrowing at this large and growing rate? It can be perfectly reasonable to borrow... you just have to be aware of the cost." But he admits that deficit spending is not sustainable without effecting the economy -- sooner or later if fewer funds are available for the private sector, we're going to see some combination of decreased investment and higher interest rates.
So are the reasons good enough? Most economists agree that deficits make sense in times of emergencies - like war. Or to stimulate the economy during a recession. But our economy seems to be getting on track just fine without need for any extra spending. War might be a good reason (laying aside the question of whether we should be at war) -- but it seems like we ought to be able to fund it without record deficits if we didn't waste so much.
Which brings me to the point. The road leaving a deficit is paved with some combination of tax increases and spending cuts. The current Bush adminstration and congress haven't exactly demonstrated a penchant for fiscal control - let alone cutting costs. So I think we're in trouble.
Veronique de Rugy had a wonderful piece on the Cato site yesterday, Doing a Poor Job with Our Money, that enumerates Bush's poor record with fiscal control - from "No Child Left Behind" to the medicare prescription benefits.
Using a nice turn of phrase, The Wall Street Journal (WSJ) published an editorial this morning titled, No Politician Left Behind which discloses that spending on education has risen significantly every year since 1990, while test scores during that same timeframe have remained absolutely flat.
There also a good editorial from Tuesday's WSJ titled Road Kill that details the profligate spending of congress on a highway transportation / road construction bill -- the opening quote being, "An old political adage has it that the most dangerous place in Washington is between a Congressman and asphalt."
Plus ça change, plus c'est la même chose.
