Dean Baker: "the country really has no near-term or even mid-term deficit problem."

[Better Believe It]

The Deficit Commission’s Parallel Universe
Dean Baker
Dean Baker is an American macroeconomist and co-founder of the Center for Economic and Policy Research, with Mark Weisbrot. He previously was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University. He has a Ph.D. in economics from the University of Michigan.
November 11, 2010

First, the current deficit should not even be viewed as a problem. Yes, a deficit of $1.4 trillion is big, but this is a direct result of the loss of demand stemming from the collapse of an $8 trillion housing bubble. This bubble was driving the economy until its collapse. There were two channels through which the bubble generated demand in the economy: bubble-inflated house prices led to a boom in construction, bubble-inflated wealth led consumers to increase their spending, pushing saving rates to almost zero.

This demand has disappeared now that the bubble has deflated. The economy has lost more than $600 billion in annual construction demand as builders cut back in response to an enormous over-supply of both residential and non-residential property. Similarly, consumption has plummeted. This left an enormous gap in demand that, at least in the near-term, can only be filled by the government. If the government were to spend less—say it instantly balanced its budget—the primary result would be a further decline in demand and more job loss.

The failure to understand current deficits also leads to a misunderstanding of the debt burden. Simpson and Bowles raise fears of an exploding debt reaching 90 percent of GDP by the end of the decade. They have raised the prospect of a crushing interest burden facing future generations of taxpayers.

But there is no real basis for this concern. There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely. If the Fed holds the debt, there is no interest burden for future taxpayers. The Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden. And the Fed has other tools to ensure that the expansion of the monetary base required to purchase the debt does not lead to inflation.

This means that the country really has no near-term or even mid-term deficit problem. The current deficit is a positive. In fact, if it were larger we would have more jobs and growth. Furthermore, there is no reason that the debt being accumulated at present should pose any interest burden on future generations. In this vein, it is worth noting that Japan’s central bank holds debt amounting to almost 100 percent of that country’s GDP. As a result, Japan’s interest burden is considerably smaller than the United States’s, even though Japan’s debt is almost four times as large relative to the size of its economy.

Read the full article at:

http://www.bostonreview.net/BR35.6/baker.php

[chill_wind]

1. "It would be best if this is yet another one of those Washington commissions

that is quickly forgotten."

That's exactly what Galbraith said to them, as well.

And this is especially worth highlighting, too:

There is one item worth noting for its absence. Simpson and Bowles apparently never considered a Wall Street financial-speculation tax. This is an obvious source of revenue that even the International Monetary Fund is now advocating in recognition of the enormous amount of waste and rents in the financial sector. It is possible to raise large amounts of revenue from such a tax.

University of Massachusetts economist Robert Pollin and I calculated the potential revenue at more than $100 billion a year, with little impact on productive economic activity. The main impact would be to reduce the shuffling of financial assets. The refusal to consider this source of revenue is striking since at least one member of the commission has been a vocal advocate of financial-speculation taxes. Bowles is a director of Morgan Stanley, one of the Wall Street banks that would be seriously affected by such a tax.

K & R for Dean Baker.

[laughingliberal]

2. K & R nt

[ProgressiveEconomist]

4. Kick!

[leftstreet]

3. K&R

Very interesting article

[ProgressiveEconomist]

5. 'If the Fed holds the debt, there is no interest burden for future taxpayers.' BRILLIANT,

just BRILLIANT!

But only in deflatonary times like the present. Not for times of high inflation like the mid-late 70s. This is called "monetizing the debt".

[Kat45]

6. Good article. Just posted it on my Facebook page. n/t

[Better Believe It]

7. For weekend DU'ers

[ProgressiveEconomist]

12. Kick!

[Fumesucker]

8. K&R, thanks for posting..

[chill_wind]

9. kick.

[Hannah Bell]

10. kr

[Overseas]

11. K&R ! Great article. /nt

[marketbreakaway]

13. Moronic - Sorry Folks but this is fantasy

If it is true that all we have to do to nullify the debt is have the central bank hold it, then why is Ireland, Greece and Spain in so much trouble? Why don't they just monetize their debt?

Oh! You say, because they are members of the EU and cannot print their own money.

But! I say, they could go back to their own currency in a heart beat if that is all it took to erase the debt.

Sorry folks, this is nonsense. You know it. There is no free lunch and Democrats would be a lot better off if we worked within the realm of reality.

[Hannah Bell]

14. yes, dean baker doesn't know what he's talking about. He's only a world bank consultant.

Dean Baker (b. July 13, 1958) is an American macroeconomist and co-founder of the Center for Economic and Policy Research, with Mark Weisbrot. He previously was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University. He has a Ph.D. in economics from the University of Michigan.

Basing his outlook on house-price data-sets produced by the US government and Yale economist Robert Shiller, Baker was among the first economists to assert there was a bubble in the US housing market in 2002,<7><8><9> well before its peak in late 2005<10> and one of the few economists to predict that the collapse of this bubble would lead to recession

Since 1996 Baker has been the author of a weekly online commentary on economic reporting. The Economic Reporting Review was published from 1996 to 2006; subsequently he has continued this commentary on his weblog Beat The Press, which was formerly published at The American Prospect, but is now located at the CEPR website.

Before co-founding the Center for Economic and Policy Research in 1999, Baker was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University. "He has also worked as a consultant for the World Bank, the Joint Economic Committee of the U.S. Congress, and the OECD's Trade Union Advisory Council."<5>

From 1996 to 2006 Baker was the author of a weekly online commentary on the New York Times' and Washington Post's economic reporting.<6> From 2006 he continued this commentary on the weblog Beat The Press, where he critiques economic reporting in the leading broadsheets, NPR and other mainstream news sources.

http://en.wikipedia.org/wiki/Dean_Baker

[Taitertots]

15. How easy do you think it is to change currency?

Very, Very, Very difficult.
Especially if you are stuck with a central bank that is keen to screw you over in favor of rich countries.

[Better Believe It]

16. How about giving the bondholders a "haircut"? :)

:)