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Posted by on Mar 4, 2009 in Economy, Politics | 2 comments

Was Cheney Right? Do Deficits Matter?

Dick Cheney may have been (snark alert) the most wildly popular vice president of the last century, but that doesn’t mean he knew what he was talking about when he purportedly said, “Deficits don’t matter.”

According to Harvard Econ Professor Greg Mankiw, more than 80 percent of economists beg to differ with his Cheneyness; in fact, that super-supermajority believes a “large federal budget deficit has an adverse effect on the economy.”

Of course, TMV readers — including “greenschemes,” who yesterday shared his inner monologue on this subject — might wonder how and why deficits harm the economy. Treasury Secretary Geithner offers some insight:

“Failure to reduce deficits to this level would result in higher interest rates as government borrowing crowds out private investment, leading to slower growth and lower living standards for Americans,” he said.

Last night, I also put these questions to Professor Mankiw, who responded by emailing a link to this 20-plus page document, which he co-authored. (It’s a PDF of what appears to be a chapter in a book, though which book is not clear.)

Because I’m not an economist nor am I inclined (by either nature or nurture) to easily grasp economic concepts, I’ve only managed to make it (so far) through about six pages of the PDF that the professor graciously forwarded. From those few pages, plus a quick-scan of the later pages, this much seems clear: Despite widespread agreement among economists that large deficits are bad — and multiple real-world signs of their ill effects — there are more questions than answers, and thus the ultimate incentive for avoiding large deficits is the abiding uncertainty of just how detrimental they might become. Translation: Avoid large deficits because it’s better to be safe than sorry.

And that even I can understand.

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