The Importance of the Deficit
In commenting about John McCain’s budget plans, Matthew Yglesias threw out this comment:
Given the present circumstances, I can’t think of any good reason for a presidential candidate to be promising to that we’ll be at balanced budgets in four years. It would be nice to see the deficit on a decreasing trajectory rather than an increasing one, but achieving short-term balance isn’t necessary or even necessarily desirable.
While it’s true that a balanced budget probably isn’t possible in the next four years, getting the deficit back on a decreasing trajectory is an absolute necessity. Why? Because it’s one of the easiest steps we can take towards strengthening the dollar, which as of today is now trading at an all time low against the Euro.
A weak dollar right now is part of the cause of high oil prices, and is causing a cascading effect of higher prices everywhere else in the economy, too. Wholesale prices rose 1.8% last month alone, and are up 9.2% over the past year. When you consider that the U.S. is a large net importer of goods, it’s impossible to think that a weak dollar isn’t behind this rise in prices.
Now, with our credit markets in crisis, the last thing this country needs is for foreign investors to get scared off by a weak dollar. As this excellent post at Information Arbitrage explains, we need those investments if we’re going to carry through this problem in the credit markets, and that ain’t gonna happen if investors don’t have confidence in the dollar.
One of the best ways to stengthen the dollar and bolster U.S. credit is to show that we can get our spending under control. In other words: we can cut spending and put ourselves on a trajectory towards a balanced budget. Alas, this is Presidential campaign season–which means that all investors can see right now are promises of tax cuts and spending increases from both candidates.
That’s not the message we need to be sending.
Image: Market Preview blog.
UPDATE: One thing that needs to be made clear, as my colleague Dave Schuler points out in the comments below, that part of “balancing the budget” means we need to stop accounting federal expenditures as “off-budget.” It’s easy to make it look like you’re doing something about the deficit when you “don’t count” large expenditures. The reality is that ALL federal spending needs to be in balance with ALL federal income, period.
Alex, the budget is already on a “decreasing trajectory”. That’s not the problem. The problem is that too much is off-budget and the total projected expenditures exceed the total projected revenues by too much.
This is a bipartisan problem. Neither party has a monopoly on bad accounting.
The sad fact is that it’s easy to balance the budget as long as you’re willing to take stuff that would bring you out of balance off-budget.
For support of my point see here.
Agreed. When I think of reducing the deficit, I think of reducing it for ALL federal spending, not just what we conveniently call the “budget.” We really ought to do is stop allowing “off-budget” accounting. How can we keep Social Security “off the budget” when we use payroll tax surpluses to pay for discretionary expenditures?
Again, no arguments here.
Alex. I am pleasantly surprised that you have such good words to say about Bush. I really thought that you didn’t approve of him.
I mean, Bush promised to cut the deficit in half in 2004. How did he do?
The budget deficit has gone from $413B (3.6% of GDP) in 2004 to $318B (2.6% of GDP) in 2005 to $248B (1.9% of GDP) in 2006 and even further to $162B (1.2% of GDP) in 2007.
Now at the time, the MSM and democrats (but I repeat my self) thought it could not be done. An example is from CNN.
Now what is McCain’s plan?
So as a service for your readers. Can you please cite a source that thought that Bush’s plan to cut the budget in half would work and thinks that McCain’s plan to balance the budget won’t?
“Alex, the budget is already on a “decreasing trajectoryâ€.”
Only if you accept this administration’s phony accounting by putting far too much (including the Iraq and Afghanistan wars) off budget. We have been increasing the actual amount of debt outstanding by over $500 billion every year since Bush’s first budget.
If you’d read the other three sentences of his comment, you’d have your answer.
One of the best ways to stengthen the dollar and bolster U.S. credit is to show that we can get our spending under control.
Alex, doesn’t a larger deficit lead to a stronger dollar?
Seriously. I know it’s SOP for the conservatives to say that a strong dollar requires spending and deficit control, but the economics says otherwise. So, if the goal is to get a strong dollar, we need higher interest rates, which means lots of borrowing.
Unless someone ’round here has a better explanation…
James,
I should have been clearer. I intended to amplify what Dave Schuler was saying, not contradict it.
That picture is awesome.
The question I have. Germany and France have debt levels more than 2x as high as the US. Japans debt level is more than 5x as high as America’s. With their poor demographic trends and much higher debt levels why doesn’t that impact their currencies more?
Before we bring Bush milk & cookies let us remember that the massive deficit is a problem of his own making. He inherited a pretty strong hand and proceeded to screw it up.