Why does this year’s deficit seem to create so much controversy? In theory large deficits threaten future prosperity. That’s because when governments run deficits they must borrow to make up the difference. The borrowing comes from scarce funds and can bid up interest rates. This can slow productivity growth—the cause of rising living standards.
Andrew Chamberlain blogg “Do Deficits Matter,” shows that this is not necessarily the case. “The historical relationship between deficits and interest rates is murky.” Many things in the economy affect the interest rates. It seems that government borrowing and interest rates tend to move in opposite directions altogether.
Deficits are clearly harmful to some extent. The question is to what extent? The average deficit, over the last 42 years, has been 2.1 percent of the GDP. In order for deficit to be considered large it must be 5.9 percent of the GDP or larger.
This year’s deficit is projected to be 3.6 percent of the national income. In the 1980s and 1990s the deficits was 4-5 percent and “hardly cause for panic.”
1 comment:
-1 on Luise's post and Sandy's comments for spelling mistakes.
Umm ... Sandy ... why do you need to hear my opinion when you have me for Principles? I'd think you'd be tired of it by now. ;)>
Anyway, my opinion (which is supported by a lot of theory) is that deficits don't matter. Note that I'm not rigid about that - I used to think they mattered a lot, but I gave up on that belief when it was clearly proved wrong.
So, if it doesn't matter, why do they talk about it? I think this is cheap talk. That is, it is an issue that politicians can talk about freely, and even change policy, without really harming anything. Really serious issues like (say) Medicare reform get ignored.
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