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The Trouble with Deficit Finance / Artikel mises.org

verfasst von - ELLI -, 06.02.2003, 15:31

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The Trouble with Deficit Finance
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by Roger W. Garrison

[Posted February 6, 2003]

[img][/img] Elisabeth
Bumiller reports in the Washington Post ("Bush's $2.2 Trillion
Budget Proposes Record Deficits," 2/04/03) that a budget deficit of $304
billion is forecast for the current fiscal year—with higher deficits to
follow. (These figures, she notes, leave the costs of a war with Iraq out of
account.)

Mitchell E. Daniels Jr., the White House budget director, is
reported as claiming that the current deficit,"representing 2.7 percent
of the nation's gross domestic product, was not large enough in percentage
terms to cause trouble or to raise interest rates...."

Didn't Everett Dirksen used to say that the main purpose of
GDP (GNP in his day) was to make everything else look small by comparison?

Even at that, Mr. Daniels made the deficit look a little
smaller than it actually is. His 2.7 percent suggests a GDP of about $11,300
billion. The readily available Federal Reserve Economic Data (FRED) provided
by the St. Louis Fed shows that current GDP is closer to $10,300 billion,
making the $304 billion deficit equal to 2.95 percent.

More to the point, GDP makes for a politically attractive
but economically irrelevant denominator. How much is government borrowing
relative to the funds available for borrowing? The relevant denominator is
total saving and not total output. FRED shows the current annual rate of gross
saving to be $1,574 billion. And the government is borrowing just under 20
percent of it. Does Mr. Daniels believe that this percentage is not large
enough to cause trouble or to raise interest rates? And if so, just what
percentage would be large enough?

Even more to the point: At that level of borrowing, the
effect of the deficit will be:

<ul>
~ higher interest rates (if the government borrows
domestically) OR:   
~ increased inflation (if the Federal Reserve monetizes the
debt) OR:   
~ weakened export markets (if the government sells debt
abroad) OR:   
~ tax hikes (possibly in the form of a Johnsonesque"surtax")
OR:   
~ all the above in some combination.</li>
</ul>

In recent years changes in international capital flows have
been the primary consequence of increased deficits. This means that the US
Treasury is going head-to-head with the US exporting industry. Foreign funds
flowing directly or indirectly into the Treasury are funds that are not spent
on US-produced goods and services. Maybe Mr. Daniels should express the budget
deficits as a percentage of total US exports. FRED reports the latest figure
on annual exports as $1,036.2 billion, making for a deficit-to-export ratio of
nearly 30%.

Again: more to the point, there is no basis for believing
accommodating changes in international capital flows will continue
indefinitely. Our foreign trading partners may not keep saving us from the
more direct consequences of high federal budget deficits. If US markets begin
to lose their attractiveness or if US exporters begin to get their way in
Washington, then we're back to inflation, high interest rates, and/or tax
hikes.

All the while, entrepreneurs in the private sector will have
to make their guesses about the particulars of the deficit accommodation,
hedge as best they can, and take their chances. And if they guess wrong, they
can lose big. The private sector is good at satisfying consumer demand, but
it's not much good at guessing what's in that grab bag that we call a budget
deficit. Many, in fact, will stay liquid until the deficit problem is
addressed. (This is not to deny that there are other problems [e.g. war] that
contribute more to current attractiveness of liquidity.)

It's important to recognize that there is a tax code but
there is no deficit code. The uncertainties associated with large federal
budget deficits warn against exclusive focus on the total spending done by
government. It does matter how that spending is financed. My supply-side
friends never tire of reminding me that taxes have bad effects as well. And
surely they do. So too does inflation. But in the long run big deficits are
not an alternative to taxes and/or inflation but rather a grab-bag bundling of
them. The uncertainty about just which bad effect the economy will ultimately
have to cope with is itself a bad effect.

It's all well and good to work towards a reduction in the
amount of government spending, all of which has to get financed somehow. In
the meantime, however, we should not let the deficit apologists get away with
trivializing a twelve-digit deficit by comparing it to GDP.

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Roger Garrison teaches economics at Auburn University. Send
him MAIL. See also Do
Deficits Matter?

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The Trouble with Deficit Finance / Artikel mises.org - - ELLI -, 06.02.2003, 15:31