Thursday, February 18, 2010

When the US Government should get serious about budget defecits

Warning: I know almost nothing about macroeconomics. I'm kinda talking out of my ass here.

There's been a lot of harping about the budget deficit recently. A lot of it comes from Republicans who didn't seem to mind deficit spending when George W. Bush was president during relatively stable economic times. But now that Obama is president and there's a major recession, suddenly they feel that we have to tighten our belts at this very instant or the economy will explode or something.

Here's the thing: last time I checked (i.e. just now), the U. S. Government could borrow money at about 3.8% by selling 10-year T-bills. If you're willing to lock up your money for 30 years, they'll give you 4.7.%. This is pretty damn cheap. (Especially when you take into account inflation: because the future dollars the government uses to pay back the loan are worth less than the present dollars they receive, the real interest rate the government pays is actually lower.) If I want to get rates like that, I have to put up some major collateral (like my house). Uncle Sam can gets these rates just by asking for them. What this means is that there are a hell of a lot of people all over the world who are not particularly concerned about the U. S. budget deficit, and are willing to place enormous financial bets on this being the case. Would you lend someone money at 3.8% if you weren't pretty darn sure they could pay it back? No. So all this Republican (and Democratic) hysteria about the deficit seems utterly contradicted by what the treasury market is telling us with cold, hard numbers.

As long as people are willing to lend you money at such cheap rates, why on earth would you stop spending it, when there are so many things that desperately need attention? As long as the federal government can find programs that will yield a higher rate of return than the cost of borrowing money, there's really no reason to curb spending. I suspect that there's a lot of health care, infrastructure, research, social safety net and education spending that could beat the 3-5% interest rate at which Uncle Sam can borrow. (Surely there are studies about this? Is the federal government absolutely incapable of spending money in a way that yields a higher return than 3 to 5%, minus inflation? ) Of course, wasting money is always a bad idea: no amount of cheap interest rates makes bridges to nowhere or immoral wars a worthwhile use of money.

Politically, closing a budget deficit is hard: you have to cut spending or raise taxes. Both of these cause suffering. As long as the US can borrow money cheaply, I don't think there will be political will to solve the budget deficit, and furthermore I'm not sure it should even be much of a priority.

Am I missing something here?

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