Of wolves, termites, and pussycats

US Capitol dome

For more than six years now the nation has been unable to muster the political consensus needed to deal decisively with the immense federal budget deficit. One of the reasons is that the public and the Congress are faced with three quite different and conflicting views about the economic consequences of persistent large deficits.

One view often heard on Wall Street, in international financial circles, and among some economists is that continued failure to reduce the U.S. budget deficit threatens to cause an economic crisis, characterized by a plummeting overseas value of the dollar, soaring interest rates, and a severe recession exacerbated by financial disturbances.

In marked contrast, several prominent economists and public opinion makers have recently been arguing that the problem of the budget deficit has been vastly overstated and that excessive concern about it is getting in the way of addressing more serious economic and social problems. Here the left of center finds common ground with the supply-siders of the far right. Robert Eisner, Robert Heilbroner, and the left wing of the Democratic party join Jack Kemp, Arthur Laffer, and other supply-siders. Al­though they come from different analytic and ideologic backgrounds, they all arrive at a common set of conclusions deemphasizing the importance of the deficit.

Still a third viewpoint , shared by the majority of economists who have addressed the problem, and among whom I find myself, holds that the consequences of perpetuating large budget deficits will be neither explosive nor harmless. Rather, by reducing sharply the nation’s already low rates of saving and investment, the deficits will slowly and almost imperceptibly but inexorably depress the potential growth of American living standards (projected deficit levels, box, p. 28).

In an economic bestiary, the conventional Wall Street view of the deficit might be characterized as the wolf at the door; the second view as the domesticated pussycat ; and the third as the termites in the basement.