These days it's hard to pick up a newspaper or turn on a news program without encountering stern warnings about the federal budget deficit. The deficit threatens economic recovery, we're told; it puts American economic stability at risk; it will undermine our influence in the world. These claims are reported as if they were facts, plain and simple.
Yet they aren't facts. Many economists take a much calmer view of budget deficits than anything you'll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers. The long-run budget outlook is problematic, but short-term deficits aren't — and even the long-term outlook is much less frightening than the public is being led to believe.
The sudden ubiquity of deficit scare stories isn't being driven by any actual news. It has been obvious for at least a year that the U.S. government would face an extended period of large deficits.
To me — and I'm not alone in this — the sudden outbreak of deficit hysteria brings back memories of the groupthink that took hold during the run-up to the Iraq war. Now, as then, dubious allegations, not backed by hard evidence, are being reported as if they have been established beyond a shadow of a doubt. Now, as then, much of the political and media establishments have bought into the notion that we must take drastic action quickly. Now, as then, those who challenge the prevailing narrative, no matter how strong their case and no matter how solid their background, are being marginalized.
And fear-mongering on the deficit may end up doing as much harm as the fear-mongering on weapons of mass destruction.
Contrary to what you often hear, the large deficit that the federal government is running right now isn't the result of runaway spending growth. Instead, well more than half of the deficit was caused by the ongoing economic crisis, which has led to a plunge in tax receipts, required federal bailouts of financial institutions, and been met — appropriately — with temporary measures to stimulate growth and support employment.
Running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do. If anything, deficits should be bigger because the government should be doing more to create jobs.
True, there is a longer-term budget problem. Even a full economic recovery wouldn't balance the budget, and it probably wouldn't even reduce the deficit to a permanently sustainable level. Once the economic crisis is past, the U.S. government will have to increase its revenue and control its costs. And in the long run there's no way to make the budget math work unless something is done about health care costs.
But there's no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they'll have risen to 3.5 percent of GDP. How scary is that? It's about the same as interest costs under the first President George Bush.
Why, then, all the hysteria? Politics.
The main difference between last summer, when we were mostly (and appropriately) taking deficits in stride, and the current sense of panic is that deficit fear-mongering has become a key part of Republican political strategy, doing double duty: It damages President Barack Obama's image even as it cripples his policy agenda. And if the hypocrisy is breathtaking — politicians who voted for budget-busting tax cuts posing as apostles of fiscal rectitude, politicians demonizing attempts to rein in Medicare costs one day (death panels!), then denouncing excessive government spending the next — well, what else is new? The trouble, however, is that it's apparently hard for many people to tell the difference between cynical posturing and serious economic argument. That is having tragic consequences.
For the fact is that thanks to deficit hysteria, Washington has its priorities all wrong: All the talk is about how to shave a few billion dollars off government spending, while there's hardly any willingness to tackle mass unemployment. Policy is headed in the wrong direction — and millions of Americans will pay the price.
THE NEW YORK TIMES