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Destroying the lair of the budget balancing cretins

If the deficit hawks are "really concerned about our children's future", they should focus on the over-valued dollar.

Last Modified: 13 May 2013 11:58
Dean Baker

Dean Baker is a US macroeconomist and co-founder of the Centre for Economic and Policy Research.
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"Since some of the spending will make the economy more productive, a public investment programme today should make our children richer, not poorer," writes Dean Baker [EPA]

By now almost everyone knows of the famous Excel spreadsheet error by Harvard professors Carmen Reinhart and Ken Rogoff. It turns out that the main conclusions from their paper warning of the risks of high public sector debt were driven by miscalculations.

When the data are entered correctly, this hugely influential paper can no longer be used to argue that the United States or other wealthy countries need fear a large growth penalty by running deficits now. There is no obvious reason that governments cannot increase spending on infrastructure, research, education and other services that will both directly improve people's lives and foster future growth.

With the advocates of austerity on the run this is a great time to pursue the attack. The public should understand that the often expressed concerns about long-term growth, the future and the well-being of our children are simple fig-leafs for inhumane policies that deny people (aka the parents of our children) work and redistribute income upward.

We can only harm our children by reducing the deficit in the current economy, we are not helping them. The wealthy people who benefit from the policies of austerity may have the power to keep them in place, but the public should realise that the politicians and public figures who promote these policies are not doing it out of a concern for the future.

Crowding out private investment

Once we get past the Reinhart-Rogoff debt disaster story, the only argument left against government deficits is the standard economic argument that it could raise interest rates by crowding out private investment. This argument can easily be shown to be ridiculous; there will almost certainly not be any crowding out in the economy now.

Interest rates will likely remain very low even if the government undertook a major investment programme. Furthermore, the spur to demand is likely to increase private investment because firms invest more when they see demand for their products growing. Since some of the spending - such as spending on improved infrastructure and reduced energy consumption - will make the economy more productive, a public investment programme today should make our children richer, not poorer.

This fact is not changed even if we pass on more government debt, although debt can raise distributional issues within generations. This point is straightforward. At some point everyone alive today will be dead. 

Inside Story Americas - Young and in debt

This means that the government debt (bonds) that people alive today possess will be passed on to future generations. Future generations will not just owe future debt; they will also own future debt. If we take the extreme case where the ownership of government bonds is evenly divided among our children and grandchildren, then the burden of the debt will be money that they are paying to themselves. How can that make them poorer?

Of course, the debt is not evenly held so there can be intra-generational distributional issues. Suppose that Bill Gates' grandchildren end up owning all the debt. Then the debt will impose a burden on everyone else's children and grandchildren. They will be paying interest to Bill Gates' grandchildren.

But this is an issue between Bill Gates' grandchildren and everyone else's grandchildren. If our children and grandchildren tax Bill Gates' grandchildren, then they will face little burden from debt built up today.

Many of the deficit scaremongers have raised the issue of foreign, and especially Chinese, ownership of the debt. While this may appeal to racist sentiments, it has little to do with government deficits.

China is able to buy up government debt because it has a trade surplus with the US of roughly $300bn a year. As long as it has a $300bn trade surplus China can buy up government debt, regardless of whether or not the government is currently running a deficit. If the government is not currently borrowing then China could just buy up government bonds in the secondary market where hundreds of billions of dollars of government debt are bought and sold every day.

Dishonest fear-mongering

Of course, even if China did not buy up government bonds, but instead bought the bonds of private corporations or stock and US real estate, the situation would be the same. A portion of future output would be paid to China and other foreigners as interest, profits or dividends.

If this outflow is large enough (the net flow of such payments is still in the US' favour) then it will pose a burden to future generations, but this speaks to the importance of getting the trade deficit down. This in turn depends overwhelmingly on the value of the dollar. If the value of the dollar were lower we would export more and import less, bringing our trade closer to balance. If the deficit hawks were really concerned about our children's future, they would be focusing on the over-valued dollar, not yelling about budget deficits.

Finally, it is important to keep these issues in some proportion. Even though our debt burden is relatively large, because interest rates are extremely low, the interest burden is not. In fact, relative to the size of the economy it is near post-war lows. It is at post-war lows if we subtract the $80bn in interest refunded to the Treasury each year by the Federal Reserve Board.

While this burden is projected to rise somewhat when interest rates return to a more normal level, even in a decade the interest burden is not projected to be back to its early 1990s level. In short, there is absolutely no horror story in this picture.

The deficit hawks have used dishonest fear-mongering to prevent the country from taking the steps needed to get the economy back to full employment. These people have enormous economic and political power. As a result they may be able to keep their austerity policies in place. But we have to recognise, this is about making the rich richer, not helping our children and grandchildren.

Dean Baker is a US macroeconomist and co-founder of the Centre for Economic and Policy Research.

Follow him on Twitter: @DeanBaker13

You can follow the editor on Twitter: @nyktweets

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The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.

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