Deficit Hawks Miss the Point

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Those who want to target the housing market or take a scalpel to military spending and subsidies can take heart from a real argument about how the budget deficit affects jobs.

…there is no plausible argument that current unemployment or slow growth stem from the federal budget deficit. The mechanism through which budget deficits can lead to unemployment and slow growth is the bond market: government borrowing raises interest rates, which makes credit more expensive for businesses. But the 5-year treasury bond is under 2%, and the most recent auction had a bid cover of almost 3 times. Unsurprisingly, with interest rates low, the cost of credit ranks low on the list of businesses’ chief concerns. Those who acknowledge that deficits don’t seem to be driving up the cost of credit, but still want to blame deficits for the poor economy, have pointed to business uncertainty over potential future tax increases to cover government debt. But how does enacting an $800 billion two-year tax cut and then cutting $50 billion or even $100 billion in spending assuage business uncertainty about future debt? In any case, the main reason businesses are not expanding is that they are worried about lack of demand from consumers and other businesses, who are still deleveraging from the debts they built up during the 2000s and the collapse in their asset values during the financial crisis. Karl Smith noted last week that the public-debt and private-debt figures are largely mirror-images of each other, and that government budget deficits are healthy in a deleveraging economy because government is essentially taking on private debt and paying lower interest rates on it. But even if you find fault with that perspective, how can you argue that cutting government spending this year will raise demand or growth, or lower unemployment, within the next year or two?

Still, this commenter makes some good points about non-discretionary spending.

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Filed under: Business/Economy, Politics, USA Tagged: bonds, budget deficit, discretionary spending, financial crisis, military spending, recession, unemployment

 

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