August 30, 2012
Morgan Stanley director Erskine Bowles got a couple of big things wrong in a “Room for Debate” comment in the NYT. First he refers to “our commission’s plan.” His commission did not produce a plan. To produce a plan it would have needed 14 votes. The plan that he and his co-chair, Alan Simpson, developed only got the support of 11 members of the commission.
He also refers to the crisis that will result from not taking steps to reduce the deficit as “the most predictable economic crisis in history.” Actually, the most predictable crisis in economic history was the downturn that we are now suffering from due to the collapse of the housing bubble. It was easy to see that the bubble would burst and lead to a large downturn, since there was no easy way to replace the $1.4 trillion in annual demand generated by the bubble.
There is no obvious crisis associated with the current budget path. It would be helpful if Bowles could spell out what he envisions, since a country that has its own currency faces no prospect of ever seeing a crisis like that facing Greece or Ireland, which don’t have their own currency. It is also worth noting that the interest burden on the debt, net of payments from the Fed to the Treasury, is only around 1.0 percent. This is the lowest that it has been in the post-war era.
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