Following its practice of merging editorial content with news, the Washington Post had yet another lead article warning about the budget deficit and national debt. While there are some efforts at balance in the piece, it still misrepresents the nature of the deficits in these years. It also carries on the Post's longstanding practice of misleading readers about the relationship between the deficit and the dollar. The article is misleading in that it does not point out that a substantial portion of the deficit (e.g. the $700 trillion TARP) is being used to by assets. This money is not spending that just goes out the door, like money spent on the war in Iraq or on health care. The government will likely lose money on the TARP (my bet at least), but it will get most of this money back when it sells the assets (shares of preferred bank stock) that it has acquired through the program. The discussion of the dollar fails to note that the main factor that will determine the value of the dollar in the long-run is the trade deficit, which bears no direct connection to the budget deficit. The dollar will fall (actually it has already been falling against many currencies over the last month) because the United States has a large trade deficit. The decline in the dollar will in turn eventually reduce the trade deficit, which will reduce the outflow of dollars each year. Readers should understand that the dollar will fall regardless of whether or not we run large budget deficits. A sharp decline in the dollar is the only plausible way to bring the trade deficit to a manageable level. The fall in the dollar is therefore a necessary correction mechanism, it will not be the result of a profligate fiscal policy.
--Dean Baker
