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.

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Alex Knapp
About Alex Knapp
Alex Knapp is Associate Editor at Forbes for science and games. He was a longtime blogger elsewhere before joining the OTB team in June 2005 and contributed some 700 posts through January 2013. Follow him on Twitter @TheAlexKnapp.

Comments

  1. Dave Schuler says:

    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.

    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.

  2. Dave Schuler says:

    For support of my point see here.

  3. Alex Knapp says:

    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.

    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?

    This is a bipartisan problem. Neither party has a monopoly on bad accounting.

    Again, no arguments here.

  4. yetanotherjohn says:

    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.

    Like a cowboy-boot wearing David Blaine, President Bush has promised to perform an amazing feat of prestidigitation: he’s going to saw the whopping federal budget deficit in half in just five short years.

    President Bush and members of his administration have promised to cut that deficit in half by 2009 — by spurring faster economic growth that will lead to higher tax revenue, and by Bush’s pledge to hold the line on spending.

    But Bush hasn’t offered any more specifics for cutting the deficit, and — according to some analysts — what plans he has proposed seem more likely to grow the deficit

    Now what is McCain’s plan?

    Bring The Budget To Balance By 2013

    John McCain will balance the budget by the end of his first term. The near-term path to balance is built on three principles:

    • Reasonable economic growth. Growth is an imperative — historically the greatest success in reducing deficits (late 1980s; late 1990s) took place in the context of economic growth.

    • Comprehensive spending controls. Bringing the budget to balance will require across-the-board scrutiny of spending and making tough choices on new spending proposals.

    • Bi-partisanship in budget efforts. Much as the late 1990s witnessed bipartisan efforts to put the fiscal house in order, bi-partisan efforts will be the key to undoing the recent spending binge.

    In the long-term, the only way to keep the budget balanced is successful reform of the large spending pressures in Social Security, Medicare, and Medicaid.

    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?

  5. Dantheman says:

    “Alex, the budget is already on a “decreasing trajectory”.”

    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.

  6. James Joyner says:

    Only if you accept this administration’s phony accounting by putting far too much (including the Iraq and Afghanistan wars) off budget.

    If you’d read the other three sentences of his comment, you’d have your answer.

  7. Hal says:

    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…

  8. Dantheman says:

    James,

    I should have been clearer. I intended to amplify what Dave Schuler was saying, not contradict it.

  9. Tlaloc says:

    That picture is awesome.

  10. jmo says:

    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?

  11. anjin-san says:

    I mean, Bush promised to cut the deficit in half in 2004. How did he do?

    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.