Not to be outdone by the NYT's anti-Japan tirade, the Washington Post lectured its readers on why the country will just have to learn to enjoy double-digit unemployment rather than run higher deficits. Needless to say it misrepresents a few facts to advance its agenda. The main point is that the country should not get the idea that we can endure high levels of debt, just because we have endured high levels of debt. It tells readers that it was easy to turn the high deficits from World War II into a surplus because most public spending was on defense. It notes that the plunge in defense spending following the war allowed the budget to swing from a deficit of 22 percent of GDP in 1945 to a surplus of 1.2 percent of GDP in 1947. Yes, there was a large swing, but defense spending soon swung back upwards because of the Cold War and the hot Korean War, which put the government in deficit through most of the rest of the next three decades. More importantly, it contrasts the war driven deficit with spending driven by government social programs. It tells readers that social programs "are not only hard to cut quickly; they also have a way of growing unexpectedly." Really? Are there examples of spending on social programs growing unexpectedly? CBO's projections for spending on Social Security and Medicare have been pretty accurate and in fact it overestimated the growth of Medicare expenses back in the 90s. The Post then warns us that: "The government met its World War II borrowing needs out of U.S. domestic resources, including the sale of $185 billion in low-interest war bonds. ... Today, foreigners hold nearly half the $7.5 trillion U.S. public debt. As a result, the politics of deficit reduction are not only extremely difficult, they are extremely difficult and international. Inflation could trigger a global run on the dollar and a nasty interest rate spike." Are you scared yet? If so, you need to learn a bit more economics. First, the reason that much of the borrowing is from foreigners is because the United States is running a large trade deficit. The reason that it has a large trade deficit is that the dollar is over-valued. With the dollar at its current level, the trade deficit would be the same size, assuming the same level of GDP, even if the budget were balanced. If the Post actually had the concern about the well-being of future generations that it often claims, then it would be determined to get the trade deficit down, reducing the drain that future flows of capital income to foreigners will pose to the country. In fact, the Post has never once run an editorial calling for a decline in the dollar and actually warns against allowing the dollar to drop, the only plausible mechanism for correcting the trade deficit. The run on the dollar that it shrilly hypothesizes is absurd on its face. If the dollar were to a fall a large amount (e.g. 50 percent) against other major currencies, the rest of the world would see its markets in the U.S. evaporate and U.S. exports become hyper-competitive. (imagine the screaming over the "buy American" policy in the stimulus multiplied by a hundred thousand.) They would have no choice but to intervene to prevent a plunge in the dollar. As far as the risk of inflation, foreigners who hold U.S. debt understand the risks of inflation (if not, maybe we can send them Post editorials), so there is no obvious complication if inflation reaches modest levels. Investors are used to losing money on their dollar holdings. The dollar has been falling against the euro and most other major currencies for most of this decade, so it's not clear why they would suddenly be concerned about losses associated with domestic inflation. In short, the Post can't really present much of a case to support its concern about deficits. But hey, that's no reason not to support cuts in Social Security and Medicare and tax increases for the middle class. btw, it is also worth noting that we would not be facing these huge deficits if the WaPo and its friends in policy positions had not insisted on ignoring an $8 trillion housing bubble. It would be helpful if they could tell readers when they stopped being wrong about the economy.
--Dean Baker
