Patently Absurd Logic on Budget Deficits and Debt

It’s spring and the budget deficit hawks are once again singing their scare songs about the deficit and the harm we are doing to our children. This is more infuriating than usual this year, with the story of the poisoning of the children of Flint fresh in our minds. Not only have the budget hawks kept many of these kids’ parents from working with their obsession with balanced budgets, they blocked funding that could have been used to fix the water system in Flint and hundreds of other communities around the country.

Just to go through the basic story yet again, the government is not like a family that has to pay off its debt. If we want an analogy, at least start with a corporation that expects to exist in perpetuity. The CEO of GE doesn’t go to the board and tell them about his plans to pay off the company’s debt. The board doesn’t want to hear about plans to pay off the debt; the board wants to hear how he will increase profits. And if that means GE has more debt 10 years from now than today, this is just fine.

Unlike GE, the government has a responsibility for maintaining demand in the economy. This means that when the economy has a downturn, as it did when the housing bubble collapsed in 2008, the government has to spend more and run larger deficits to generate demand in the economy. As much as folks may love the private sector, it was not going to make up the demand lost when the housing bubble crashed, or at least not any time soon. If we wanted to prevent a long and severe downturn like the Great Depression, it was necessary for the government to run large deficits. These deficits were not impoverishing our kids — they were keeping their parents employed.

The problem was that the deficit hawks got control of Congress and forced large reductions in the deficit in 2011. This slowed growth to a crawl and prevented millions of people from getting jobs. We could have been using this period of weak demand to spend money rebuilding our infrastructure, including the water systems in Flint and elsewhere. Instead we had the buffoons in Congress boasting about their heroic efforts to reduce the deficit.

There is a simple way to know when large deficits are causing problems for the economy. The basic story would be that too much spending, or too little tax revenue, is creating an overheated economy. This would place upward pressure on interest rates. With long-term interest rates near 60-year lows, it’s pretty hard to tell this story with a straight face.

Those who think that the Federal Reserve Board is preventing interest rates from rising should be able to point to high inflation. With inflation persistently well below the Federal Reserve Board’s 2.0 percent target, it is also hard to make this case. In other words, we have zero evidence of deficits posing a problem, just people running around Washington yelling about really big numbers.

What about the interest burden we’re giving to our kids? Currently that is less than 1 percent of the GDP. Back in the 1990s, the interest we paid on the debt was more than 3 percent of the GDP. And, even that level of interest payments did not prevent us from having a very prosperous decade.

There is one other point about treating the debt as a serious measure of generational equity. Interest payments on debt are just one of the ways in which the government makes commitments for the future. When the government grants patent and copyright monopolies, it is also making commitments that carry into the future. Patent and copyright monopolies allow the holders to charge prices for the protected items that are hugely higher than the free market price. They are in effect a tax that is privately collected by drug companies, software companies, the entertainment industry and others.

These payments are in fact enormous relative to the interest burdens that get the deficit hawks so excited. In the case of prescription drugs alone, the difference between what we pay for patent protected drugs, compared to drugs being sold at free market prices, is in the neighborhood of $360 billion a year. That’s equal to 2 percent of the GDP, twice the size of the current interest burden on the public debt.

The fact that the deficit hawks can scream endlessly about the horrible interest burden on our children, but don’t even seem to notice the costs being imposed by patent and copyright monopolies, suggests that they are not really concerned about our children’s well-being. Alternatively, they may have a very poor understanding of economics. Either way, their whining does not deserve the public’s attention.