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Article Artículo

Sign Language from the Invisible Hand? How Do We Know That We Need to Reduce the Deficit by $4 Trillion Over the Next Decade

Millions are no doubt wondering how we know that the government has to reduce deficits by $4 trillion over the next decade. This appears to be the magic number that underlies the budget discussions between President Obama and the Republicans in Congress, and it is widely accepted by Serious People everywhere, but where did this magic number come from?

One place where it gained prominence was in the report authored by Morgan Stanley director Erskine Bowles and former senator Alan Simpson, the co-chairs of President Obama's deficit commission. However, many other people have touted this $4 trillion number as the appropriate limit on the country's debt burden.

The attachment to a particular debt number seems more than a bit peculiar for a number of reasons. The first and most obvious is that the financial markets don't seem the least bit bothered by the current levels of debt and prospective future levels of debt. They presumably understand what most people in the Washington policy debate do not, the high deficits of the last 5 years are the result of an economic collapse, not profligate spending or huge tax cuts. This is why the interest rate on long-term Treasury bonds is at post-war lows.

The markets recognize that if the economy recovered, then deficits would again be at manageable levels. In the mean time, low interest rates reflect the fact there is little demand for capital.

However beyond the economic facts, the Washington debt mongers also seem confused on what the debt means. The proximate burden of the debt on the government is the amount of interest that we pay. Instead of being very high, this is in fact near a post-war low. 

CEPR / November 27, 2012

Article Artículo

Economic Growth

Government

The States and Full Employment
State governments spend a lot of money — usually in the form of tax breaks for companies — trying to bring jobs to their states. The problem with this kind of race-to-the-bottom strategy is that the most they can hope to achieve is to shift jobs from one

John Schmitt / November 26, 2012