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The Re-Emergence Of The Deficit Hawks – OpEd


It is often said that in Washington, no bad idea stays dead for long. This is certainly true for the crazy paranoia we see around the budget deficit and idea that it is going to bankrupt the country and leave our children impoverished. The moral of this story is usually that we need to cut and/or privatize Social Security and Medicare.

The deficit hawks had been relatively quiet the last few years. They had a big victory with the 2011 budget deal between President Obama and the Republicans in the House. This led to substantial reductions in spending for 2012 and subsequent years. These cuts slowed the economy and kept millions of people from getting jobs, but the small positive from the deal was that it temporarily silenced the deficit hawks. After all, the deficit had fallen rapidly and the debt-to-GDP ratio was going down, what did they have to complain about?

The new budget projections released last month by the Congressional Budget Office (CBO) gave them something to complain about. The projections show deficits rising as a share of GDP with the debt-to-GDP also rising.

These projections were covered widely when they came out, but perhaps more importantly they became prime talking points for the deficit hawks. The clique of groups funded by hedge fund billionaire Peter Peterson responded to the new projections like a shot of adrenaline. They are now flooding newspapers with ads warning of the evils of runaway budget deficits. The Washington Post gave another round of stern warnings about irresponsible politicians. Needless to say, there will be much more in this vein. For this reason, it is worth taking a closer look at the CBO numbers.

The numbers show the deficit rising from 2.9 percent of GDP this year to 4.9 percent by 2026, the last year in the projection period. While a deficit of 2.9 percent of GDP is small enough to leave the debt-to-GDP ratio pretty much constant (the economy would be growing at roughly the same pace as the debt), a deficit of 4.9 percent of GDP would mean the debt is growing more rapidly than the economy. This means that if the CBO projections prove correct we would be on path of rising debt and interest payments. That’s not by itself terrible, but it does imply that that interest payments on the debt will be a growing burden on the economy through time.

However, CBO’s projection of a rising deficit is not based on a projection of either increased spending or lower taxes. The basis for the projection is an assumption by CBO that interest rates will rise sharply over the next few years. While the interest rate on 3-month Treasury bills is currently around 0.25 percent, CBO projects it will rise to 3.25 percent by 2019. The interest rate on 10-year Treasury notes is currently 1.8 percent. CBO projects it will be over 4.0 percent by 2019. Based on these sharp increases in interest rates, CBO projects that net interest will increase by 2.0 percentage points of GDP over the next decade, fully accounting for the projected increase in the deficit.

While CBO may be right in its interest rate projections, it is important to realize that they have been projecting that interest rates would rise sharply for some time. In fact, their projections in each of the prior six years, from 2010 to 2015, showed that interest rates would rise sharply over the next 2–3 years. In each case, CBO’s projections proved wrong. Interest rates remained pretty much constant or actually fell. Interest rates are little different at the beginning of 2016 from what they were at the start of 2010.

It’s possible that 2016 will be the year that CBO finally gets it right, but it is also possible that it is again making dire deficit projections based on illusions about the way the economy works. If interest rates follow the same pattern they have over the last six years, rather than the path projected by CBO, there is literally nothing to worry about as far as exploding debts and deficits.

This is important background for budget debates. When the deficit hawks start yelling about projections of out of control deficits, they are relying on projections that have repeatedly shown to be wrong in the past. That is a flimsy basis for their preferred path for deficit reduction: cuts to Social Security and Medicare.

In fact, rather than suffering from deficits that are too large, the economy’s major economic problem is deficits that are too small. As has been the case ever since the collapse of the housing bubble, we don’t have enough demand in the economy. The Fed has tried to boost private sector demand by lowering interest rates, but this has clearly proven insufficient.

There is no shortage of areas where additional public spending could both boost the economy in the short-term and meet important needs for the longer term. Infrastructure spending is the top of most people’s lists. Just think, we kept people out of work in order to avoid giving the children in Flint safe drinking water. That’s not good economics and its absolutely awful social policy.

So don’t let the deficit hawks fool you. We need more spending and more demand in the economy today, and it is quite likely this will continue to be the case for some time into the future.

This article originally appeared on Al Jazeera  and is reprinted with permission.

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Dean Baker

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

One thought on “The Re-Emergence Of The Deficit Hawks – OpEd

  • February 19, 2016 at 11:24 am

    Finance spending by deficit has not worked. Deficit is larger and larger because of the imperialist wars of the Bush families and the Obama administration. Deficit spending is going to finance these imperialist wars aiming at looting resources for the wealthy or to bail out banks and Wall Street. People are getting nothing from the deficit spending. In addition, deficit is not paid by the growing economy, because the economy has been generating a very low rate of economic growth: permanent stagnation. In fact, the deficit has been transformed into cutting social programs, which is affecting the needy people. Fundamentally, the deficit is therefore a tax on the working, not on the wealthy, people. The wealthy people are obtaining the lion share of this deficit spending anyway. In short, public spending must be reallocated from the war economy to the civilian economy. This reallocation will cut the deficit and will rebuild social programs. If you cut the war economy by half, you can spend the half trillion dollars or more on infrastructure and other public projects the economy and people need. We should to impose taxes on the 62 families or so that own huge wealth or asking the wealthy to pay their share. Taxes on the Wall Street are needed as well, since these people are engaging in Ponzi schemes and have become wealthy by using the zero-interest rate of the Fed to boost their stock prices. The country must criminalize those rich who are keeping two trillion dollars out of the country in order to protect the funds from the IRS.


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