(Analysis) Recent events have changed the tenor of the budget debate worldwide. We are witnessing a moment when the entire support structure upon which the belief that there is a short-term debt problem rests, crumble. Each new day brings more data confirming both low borrowing costs for the US Government and no inflation problem in the US. Worse, very poor economic performance is reported in countries where steps were taken to address government deficits through reducing expenditure at a time of already weakened economic performance.
Some simple charts might convince those who remain skeptical about whether or not there is a short-term federal-government budget problem in the US. The first (bottom left) is the rate at which the US Government can borrow money from investors on the open markets. Borrowing costs are down, even as both government spending is elevated due to a still-ongoing war, and government revenues are temporarily down due to the business cycle. The standard benchmark for the federal government’s borrowing costs – the 10-year Treasury rate, shows that the US Government can borrow currently at an annual rate of less than 2%. Supporting arguments by budget hawks suggesting a loss of confidence in the creditworthiness of the US among investors simply isn’t true.
The other bugaboo that budget hawks pander is inflation. The second chart (bottom right) shows the annual change (in percent) of a price level that is monitored by our central bank – it is below the Fed’s oft-cited 2% target for inflation. No problem here, either.
What then drives the persistent worry about a short-term budget disaster? One thing about American society that is important to understand when assessing national economic policy is the overwhelming concentration of wealth in the hands of a very tiny minority of the population. This minority has immense political influence through its political campaign contributions. It also has a special interest in reducing its tax assessment – if income and wealth are very concentrated, logic will tell you that the source of much government revenue from taxes is going to be this same very small, but very wealthy, minority. One likely reason that government debt and budget deficits are consistent topics of political debate is the special interest that the wealthy minority has in reducing its tax assessment that funds much of our government services.
It’s time for workers and their families to ignore the constant warnings about an upcoming budget disaster that never happens, and to support economic policy that leads to a strong and sustained recovery. If the private sector won’t employ and invest because it failed miserably in the financial disaster that caused the recession, then we ought to restore the economy to its potential through democratic government action. Let’s get plucking those feathers.