Why you should care about the budget deficit

by on February 23, 2013 at 5:25 pm in Current Affairs, Economics | Permalink

…very few people in Washington actually care about the federal government’s budget deficit.

That is why you should care about the budget deficit.

The quotation by the way is from Evan Soltas, though I am not sure he endorses my conclusion.

This is not true of Evan’s piece, but often when I read someone write “no one cares about the budget deficit” I mentally sub in: “I don’t care about the budget deficit, but I don’t have a responsible argument for that view, so I will instead write that others also have very high discount rates.”

Derek February 23, 2013 at 6:16 pm

The apparatchiks did fine when the Soviet union fell apart. All was needed was a slight change in the job description.

I haven’t heard of massive layoffs in Brussels either. If anything there is even more power accumulated, no matter what is happening to most people.

Why would it be rational for anyone in Washington to worry about the budget deficit?

chug February 23, 2013 at 7:43 pm

James Buchanan, writing in “Better Than Plowing”:

["Democracy in Deficit"] made one central point; politicians enjoy spending and do not enjoy taxing. These natural proclivities must emerge so long as politicians are responsive to constituents. I have often used this example as the simplest possible illustration of public choice logic. The normative implications are clear; ordinary politics contains a procedural flaw that can only be corrected by the imposition of constitutional constraints.

mw February 23, 2013 at 6:36 pm

Everyone supporting the sequester for whatever reasons help them to feel ok about it should have been required as part of the law to publicly detail their support for eliminating 8% of incoming biomed researchers, preferably without showing signs of feeling ashamed.

NPW February 23, 2013 at 8:20 pm

I support reducing our spending to 2007 levels. I’m fairly certain that biomed was doing just fine then and will continue to do so if the sequester goes through.

No shame whatsoever.

Jan February 24, 2013 at 12:07 am

What is your definition of “just fine”? And why 2007 and not 2008 or 2006 levels?

The Original D February 24, 2013 at 12:17 am

In 2007 tax revenues were at an all time high. Do you support that too?

Rich berge February 24, 2013 at 9:27 am

Glad to see you acknowledge that, with the Bush tax cuts still in place. I would be happy to see that level of revenue again, as long as it was derived from robust economic growth

Andrew' February 24, 2013 at 7:03 am

Ummm, okay. Odd litmus test but whatever. Maybe we have too many biomed researchers. For example, the Whitaker foundation artificially boosted the number of biomedical engineering departments and those departments had to fill seats. So, when Whitaker funding stopped, it might have been short-sighted to expect someone else to seamlessly step into the gap.

This story says there are too many biomed students
http://news.sciencemag.org/scienceinsider/2012/06/nih-panel-urges-steps-to-control.html

DL February 24, 2013 at 12:13 pm
Yancey Ward February 24, 2013 at 2:02 pm

“Won’t someone please think of the biomed researchers!!”

derek February 24, 2013 at 6:10 pm

What is funny is how otherwise smart seeming folks fall for this one every time. A fool born every minute.

Laura S February 23, 2013 at 6:47 pm

Evan Soltas has shown himself to be very bright but also to be rather naive. He seems to fallen for a lot of the baited stories from the left. Lots of promise–but supporting NGDP targetting is one right answer amid a sea of wrong. Well he is still a teenager. There is hope yet.

Evan Soltas February 23, 2013 at 9:23 pm

Hi Laura S,

You have a willing listener. For which baited stories from the left have I fallen?

- Evan

Laura S. February 24, 2013 at 5:03 pm

The problem with this argument is that it proceeds in almost complete ignorance of empirical analyses that find small, if any, impacts of the minimum wage on employment. The most important work on this topic comes from two pairs of economists: David Card with Alan Krueger, and David Neumark with William Wascher. Card and Krueger find no employment impacts, whereas Neumark and Wascher find significant but limited effects.

Citing Card and Krueger as the most important work on the minimum wage is one example: Certainly they are important to the lefts claim this is settled, but they didnt really move the debate. Neumark is one reason why the Krueger claim went nowhere. There is also the issue that Card and Krueger relied on monoposy as their theoretic basis but their data also contradicts some implications of that. So the most important? No.

Older studies and studies in other countries have found a significant negative effect too. So you might wonder why–well it has to do with methods. Eg attempting to detrend teen unemployment based on adult unemployment, or using output growth rather than looking at who is being employed as the FoM.

Once you accept this, your first sentence also falls. The no minimum wage view does not stem from an almost complete ignorance of the emperics. Rather no one is quite able to make a compelling case for how to construct a study that settles the matter empirically. So there is no clear cut empirical answer on this question.

Claudia February 23, 2013 at 6:47 pm

Way to commandeer a quote … the gist of Soltas’ article is politicians don’t care about the deficit, they actually care about the size/role of the government and use the deficit as a hammer. Btw I can provide you with plenty of survey evidence that most Americans are not Ricardian equivalent types but that’s not the point here.

To follow up on your discount rate quip…would you expect politicians who are already gearing up for the mid-term elections to place a lot of weight on the far future or even 10 years out? The representative household might actually look further out than the typical politician.

Also I do think that most people have what is at least observationally equivalent to a high discount rate. Inter-temporal decision making under uncertainty is hard and many have enough day-to-day issues to keep them busy.

Andrew' February 24, 2013 at 6:03 am

Idea: we hold politicians pay (or a portion) in a clawback capable account which they receive upon exit.

Corbin February 23, 2013 at 7:11 pm

The vast budget-deficit is a mere symptom of the basic problem — an enormous, out of control central government. But the lives of the Potomac ruling class remain very comfortable… and there’s no real threat to that lifestyle — they correctly see nothing-to-worry-about from their narrow point of view.

OTOH average citizens (and even some economists) do worry, but seldom ask the most basic questions. What is government, anyway ? Where does it get its authority to spend/borrow/inflate at such staggering levels ? What are we really getting back for all that spending and control ? Might we be better off with radical changes to that Potomac status quo ?

tt February 23, 2013 at 7:20 pm

Nope, still dont care about it.

Lonely Libertarian February 23, 2013 at 7:36 pm

In my lifetime – I was born in 1946 – I have seen an amazing inversion. When I was growing up working for state/local/county/federal government was service – a sacrifice. One made that choice either out of a sense of patriotism or in exchange for security – that yes I will make less – but I will not be laid off or fired if the economy goes south.

Today one only needs to spend a few hours in or near our nations capital to see how things have reversed themselves. Government employes make more than the rest of us – have better benefits than we do – more job security…

What is wrong with this picture?

Jan February 24, 2013 at 12:01 am

Well if you think that state/local/county employees have been protected from layoffs, you’d be wrong. Positions are still being eliminated. Check the data.

And as for federal workers, the debate about whether they are under-or over-paid compared to the private sector will go on forever. There is no suitable apples to apples comparison for the same jobs and reasonable people reach different conclusions. http://www.factcheck.org/2010/12/are-federal-workers-overpaid/ I would add that government jobs are generally white collar and are filled by people who have much higher education attainment than the private sector, so that explains a significant proportion of the difference.

mdv1959 February 24, 2013 at 2:27 am

“Well if you think that state/local/county employees have been protected from layoffs, you’d be wrong. Positions are still being eliminated. Check the data.”

I’d argue that in terms of total number of people employed by our various layers of government, a lot of those people should never never have been filled to begin with because the justification was based on a bubble economy that never could have sustained them. Worse yet, in many cases those lay offs were based on seniority not performance, so we end up paying more for less. Take our fine city of Los Angeles for example (please):
http://www.latimes.com/news/local/la-me-mayor-challenges-20130224,0,3450485.story

“I would add that government jobs are generally white collar and are filled by people who have much higher education attainment than the private sector, so that explains a significant proportion of the difference.”
Federal goverment workers you might be able to make a case, but as a percentage of ALL government workers (Federal/State/County/City), no way. And since there are largely no market forces to keep salaries in check on an ongoing basis it’s impossible to know. How often does the rate of pay go down for a government position? And when does it ever go down in response to the prevailing market wage? I’d bet that on the rare occasions they do go down it was simply because they were forced to due to drops in revenue.

Jan February 24, 2013 at 11:12 am

You might be surprised to know that government employees as percentage of total workforce has actually declined since the 60′s and 70′s. It doesn’t actually appear that the bubble economy is correlated with any significant increase in government employment. OMB source: http://battellemedia.com/wp-content/uploads/2011/10/govt-employees.png I will concede that a lot of government work is contracted out these days, but those private sector employees don’t enjoy the same benefits as government workers. You can debate whether those contractors are providing useful services.

I agree that state and local workers are not as educated as federal employees, on average. They also make much lower salaries and their jobs are less secure than federal workers.

Brian Donohue February 24, 2013 at 1:34 pm

On top of the unaccounted for cost of pensions and retiree health benefits for government employees at all levels, what price tag do you assign to the much lower rates of involuntary turnover among public v. private sector employees? What is that worth?

And what do the much lower rates of voluntary turnover among public v. private sector employment suggest about revealed preferences and human capital development v. bureaucratic fiefdom building career paths?

Jan February 24, 2013 at 4:25 pm

The analyses I referred to above include total compensation, so the benefits are not a separate debate and are not unaccounted for.

I don’t assign a price tag to lower turnover rates in one sector versus another. What price tag would you assign? Share your methodology. What price does McDonald’s assign to lower rates of employee turnover? Would they perhaps count it as a positive?

maguro February 24, 2013 at 7:10 pm

I think what he’s getting at is that the job security of being a Federal employee has a value that isn’t accounted for in private sector-public sector compensation comparisons. As demonstrated by the fact that so few people leave the civil service to go back into the private sector.

Ricardo February 25, 2013 at 12:02 am

I’ve always been puzzled by claims that federal government employees get paid more than private sector employees. Your point about apples-to-apples comparisons is spot on and, I would add, any claim that the feds pay so much simply does not ring true for anyone who has ever been on either side of recruiting. Among talented accounting or economics graduates, for instance, the federal government is simply not the top employer. Banks and auditing firms don’t have to fight for top accounting students who would otherwise go work for the Treasury. Among econ graduates, banks and consulting firms attract way more interest at recruiting events than, say, the Bureau of Labor Statistics. I have just never heard of anyone who turned down a private sector job offer in favor of one from the federal government in order to get a higher salary.

joan February 24, 2013 at 4:35 am

Government employees get cost of living increases but most private sector employees do no not. What is wrong is that wages in the private sector has stagnated. Retired people get cost of living increase too , and they are also relatively better off than they use to be.

Jan February 24, 2013 at 4:35 pm

Sure private sector workers get a cost of living increase in salary. Every company is different, but at most places of work, you get an annual or even a 6 moth review and your compensation adjusts based on that, which takes into account cost of living and performance. Also, did you hear about the federal pay freeze the past two years? I work in the private sector and got pay raises in each of the past two years. There has been a steady increase in private sector hiring the past two to three years, but for government workers. Regarding retiree cost of living increases, does it make sense for benefits to not keep pace with inflation?

Jan February 24, 2013 at 4:36 pm

here has been a steady increase in private sector hiring the past two to three years, but *not* for government workers.

Michael Stack February 23, 2013 at 9:01 pm

Professor Cowen wrote:

“…but often when I read someone write “no one cares about the budget deficit” I mentally sub in: “I don’t care about the budget deficit, but I don’t have a responsible argument for that view, so I will instead write that others…”

I think that observation can be generalized – when somebody writes, “nobody cares about X” it is a good bet that the writer doesn’t care about X but can’t be bothered to marshal a decent argument.

Popeye February 24, 2013 at 4:16 pm

This discussion seems to ignore the fact that many if not most politicians do claim to care about the deficit. This fact puts the claim that “no one really cares about the deficit” in a quite different light than is being discussed here.

anon February 24, 2013 at 9:27 pm

Pay attention to what they do, not to what they say.

Popeye February 25, 2013 at 1:40 pm

Exactly. But going off about how politicians don’t care about the long term is missing the point.

Evan Soltas February 23, 2013 at 9:42 pm

I’m not sure there’s a strong logical argument for caring about the deficit solely because others don’t. It’s the reverse of a “bandwagon” appeal; it’s an appeal to contrarianism, or elitism, or something. We might care about it because Washington’s decision not to care reveals something about the underlying issue. But we would need some underlying links in the reasoning which aren’t clear to me. I would more quickly subscribe to the view that Washington’s views on any issue are independent of the merits of the issue. They seem to me to be an irrelevant point-of-reference from which to begin any coherent thought.

The right reason to worry about deficits, at least in the U.S., has precious little to do with debt and financing. It has everything, in my mind, to do with strictly longer-run concerns about resource misallocation among forms of investment.

Claudia February 23, 2013 at 10:15 pm

Neat. I think at the end you answered your own question to Laura. That said, I am sympathetic to the idea that our debt problems are largely in the future…mainly driven by popular entitlement programs…and not so much today. However, the argument has been made here previously that an inability of politicians to deal with today’s deficit signals their inability to deal with the larger, looming debt problems. And so others should be more worried and presumably start saving. It’s not so much contrarian as hyper rational, under a set of assumptions about how the economy reacts to deficit reduction, of course.

8 February 24, 2013 at 12:24 am

If you are worried about resource misallocation then forget the deficit and worry about federal spending.

Andrew' February 24, 2013 at 6:11 am

If politicians aren’t worried about it then that is an argument to worry about it. Not just because they are ass-clowns, but we are currently at odds with them in historically high ways. What has Obama done that is not zero-sum? I happen to be on the getting screwed side today. Next time maybe the other side will be on the getting screwed side, though I won’t benefit in any way whatsoever. They have nothing whatsoever to offer except to screw the other side.

msgkings February 24, 2013 at 12:38 pm

So much mood affiliation, so little insight.

You’re better than this, aren’t you?

JWatts February 25, 2013 at 1:10 am

I found his post more insightful than your response. So, the posts level of insightfulness probably varies according to the reader.

Dismalist February 23, 2013 at 11:26 pm

It’s perfectly rational for politicians to not care about the deficit. Their problem is the next election. Until costs start appearing, say, in the form of higher interest rates to be paid on government debt, to cover increased default risk, nothing will be done. I’m guessing the debt could nearly double before anything serious happens to change the path of fiscal policy.

Yes, Claudia, those pesky voters are more difficult to explain. Yes, Evan, it’s really about the size of government. But perhaps that explains the voters: I want more, and my best chance of getting more is through government.

We have met the enemy, and they is us.

DocMerlin February 24, 2013 at 6:07 am

“We have met the enemy, and they is us.”

Will you stop victim-blaming.

Rahul February 23, 2013 at 11:53 pm

What’s a responsible argument? Is there an irresponsible variety too?

8 February 24, 2013 at 12:32 am

I find it hard to believe that economists and politicians do not understand compound interest. If you run the numbers the outlook is not good. It relies entirely on stronger GDP growth. If the economy does not improve substantially, i.e. we are in a low-growth Japan scenario, then sometime in the next 5 years or so, the U.S. will essentially cross the Rubicon. Japan crossed a long time ago, so the point isn’t that a crisis is immediate, but rather inevitable. At some point interest rates do rise and when they do, it is instant game over a la Greece, because interest payments will take over the budget.

Yes, you can do NGDP targeting. But you need to cut out the banks and have the Treasury print straight into the economy. And what does faith in the currency look like? People are buying gold already in anticipation of NGDP targeting.

Thylacinus cynocephalus February 24, 2013 at 3:09 am

Very, very good post (Muy, muy bueno el post)

John

Ashok Rao February 24, 2013 at 4:40 am

Bit confused by this line of reasoning.

If your proposition is that we care about the budget deficit because Washington does not care about it, we are left with two possibilities. The former is that just about everything Washington does not care about should of proportional importance to us – maybe we should care about, then, attacks from martians, or moon aliens.

This, obviously, does not seem like an appropriate way of thinking. Then, there must be something intrinsic about a budget deficit that requires our attention. Hence, we care about the budget deficit not necessarily because our friends on the Beltway don’t, but because the deficit has some impact on our financial health, long or short run.

The real reason to care about debt is not because we’re going to face an inflation or interest rate crisis, but really because the culture of deficit spending will eventually lead to inefficiency. While the cost of capital is kept artificially low, people are encouraged to reach for bad risk in hope of making a profit, and that will undermine both a culture of capitalism and the financial system itself.

8 February 24, 2013 at 5:08 am

Government spending leads to inefficiency. Government salaries have become the largest portion of many budgets, and transfer payments already dominate the U.S. budget. The inefficiency is here today, even without a deficit. Pick any town in America (better in a blue state) and look at labor as a portion of the local government budget. I served in local government and labor costs are a cancer than can’t be removed unless the government defaults, wipes out the pensions, and tosses out union contracts. This is why even blue states like Massachusetts are restricting collective bargaining by government workers. The tumor will grow, as it will at the federal level, until the host dies.

A currency crisis will impoverish all Americans and wipe out generations of savings and accumulated capital. The effects are beginning today as business, investors and individuals are not accumulating capital through savings. Yes, it’s true capital is too low. But if you have the Fed allow interest rates to rise, then you’re going to have a real budget crisis today. So the budget crisis is real, even if you want to pin it on the Fed by causing it, those who think there is no problem do not recognize that the Fed is the only entity sustaining a failed system.

Ashok Rao February 24, 2013 at 5:18 am

I agree with most of that.

I don’t really see the link between inefficient provision of government services and a financial crisis. Sure, not crowding out private enterprise by government services (which are, as you point out, more a problem at a local level) is important.

How does this lend itself, though, to a currency crisis?

Savings rates will continue to rise over the next five years, I think as the Fed stops buying assets eventually, the effect will (slightly) be offset by a higher personal savings rate and excess capital.

Here’s how I look at it. There are some expenditures that we have to undergo. We may or may not have to provide higher welfare for the poor, but the power grid has to be revitalized, as do many of our bridges and mines. There isn’t any way to argue that this won’t happen.

The only question is whether you borrow now, at a negative basis over ten years, or a decade from now when interest rates will (hopefully) be back to normal.

Andrew' February 24, 2013 at 6:07 am

Worry about the deficit because there is more money going out than coming in. Good enough, right?

Brian Donohue February 24, 2013 at 2:17 pm

governments aren’t households, duh, so ‘deficit dollars’ only cost 80 cents or something. Marx covered all this in his seminal work on the 8-cent nickel.

Yancey Ward February 24, 2013 at 2:27 pm

Nah, according to Keynsians, we are The Land of Free Stuff.

WRD February 24, 2013 at 9:44 am

Perhaps we might also consider mentally subbing in: “While I do care about the deficit, I have higher priority objectives that conflict with deficit reduction.”

Or: “I care about deficit reduction if it also enables me to achieve a higher priority goal.”

Brian Donohue February 24, 2013 at 2:08 pm

‘Of course, the news media seem obsessed with the subject.’ The deficit, really?

YMMV, but my experience over the past few days has been an all-out publicity drive to educated the benighted American citizen of the HIstoric Cataclysm set to hit. I don’t recall a recent experience of being propagandized so heavily or relentlessly.

The American citizen pauses to acknowledge: Roger, got it. It’s a shame we gotta cut in this fashion, but y’all gave yourselves a two-year deadline to do something more sensible and couldn’t get ‘er done, so here we are.

OBAMEDIA: We’re not kidding now. Just wanna make sure you’re OK with 10,000 jobs cut over here….and over here, another 14,000.

Citizen: Damn shame that! Course, in the private economy, we saw MILLIONS of job losses a few years back, so…

OBAMEDIA: Yeah this thing is gonna hit everywhere. Longer lines at the airports, DMV, reduced post office service. And did we mention how dumb across the board cuts are, compared to, you know, the smart cuts we were…you know…on the verge of implementing?

Citizen: OK, Got it now, thanks for the heads-up though.

Carl the EconGuy February 24, 2013 at 4:46 pm

Obama and most of the pols on the Hill have now discovered that they are Ricardians. And the data do not contradict them. Neither interest rates nor exchanges rates are responsive to deficits, and only Ricardianism can explain that.

I don’t see that there is any practical limit to the debt to GNP ratio. The federal debt will never be repaid, just rolled over. Hence, interest payments on the debt is just another entitlement, i.e., a legislatively mandated transfer from current tax payers to bond holders — the only difference from other entitlement spending is that debt servicing cannot be rescinded except by haircuts and varies with the market interest rate on bonds. So the debt simply varies with interest rates, but is in all other ways exactly similar to other transfer programs. As long as bond buyers exist to hold fed bonds, there is no reason to fear the debt at all.

This is what they have finally figured out in Washington. So, it’s not the debt, stupid — it’s the out-of-control spending, no matter how it’s financed.

If you want to worry about something, worry about the spending and the institutional incentives in democracies. Buchanan was right, but his remedy in a constitutional limit on govt is unachievable. Unfortunately.

The Anti-Gnostic February 25, 2013 at 11:15 am

As long as bond buyers exist to hold fed bonds, there is no reason to fear the debt at all.

Sure, so long as you can print money and buy your own debt with it.

From my link: …the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co.

If this actually works, there are a lot of dead emperors who wish they’d thought of it.

Seriously, if this is all it takes then I’ll become a social democrat. Bring on the cradle-to-grave welfare.

Jay February 25, 2013 at 7:39 am

Another reason you should care about the budget deficit is that it is much larger than Washington or the press lets you think. There is this thing called Generally Accepted Accounting Principles (the equivalent of the consensus of climate scientists). Under these accounting rules the federal budget deficit is around $5 trillion. Anyone using the $1 trillion cash budget deficit is (as Krugman would put it) a denier.

Ricardo February 25, 2013 at 11:50 pm

If you compare accounting to science, that’s an indication you don’t understand either.

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