09/24/2005: "Deficits Don't Matter" Binge Soon to be OVER
“...As most economists will tell you, one way or another, a "real" (that is, supply-side) shock like Katrina is going to lower living standards, and that consequence cannot be easily or safely suppressed with fiscal or monetary policy. The Fed appears to understand this. But the Bush administration apparently intends to cover the costs of Katrina by borrowing more, rather than by raising taxes or cutting other spending to a correspondingly large degree. In other words, it continues to believe that deficit spending is a free lunch that imposes no costs on the economy -- and that the government, maintaining other programs and keeping taxes low throughout, can simply spend its way out of trouble.
This sounds too good to be true, and it is. Yes, deficit spending is often a good way to stabilize a turbulent economy, or to spread the cost of large investments over time -- but those valuable services do not come free. And remember that Katrina has further tightened an already restricted supply of energy; in those circumstances, the stabilizing role of fiscal policy is severely compromised anyway.
…This has been going on for years, officials point out. Why should it ever stop?
It is a fair question. Actually, it will stop, it must stop: Present fiscal trends are literally incapable of continuing indefinitely. The question is whether the pattern will break gently and over an extended period, or violently and suddenly. Will it be a Category 1 economic adjustment, or a Category 5? Confronting a risk of this sort, as with hurricanes, it makes sense to follow the old advice to hope for the best and plan for the worst
But why, you might ask, must there be any such adjustment? Why can't the trends just roll on perpetually? Mainly because of the implications for the country's external finances. This week, the Institute for International Economics published a detailed new study by William R. Cline, The United States as a Debtor Nation. It is the most thorough and up-to-date look at the issue. Cline's analysis is alarming enough, even though Katrina came too late to be taken fully into account. It is to be hoped that somebody with influence in Washington is paying attention.”
Clive Crook (National Journal).
Karen on 09.24.05 @ 09:38 AM CST