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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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  • greenschemes

    Let me sum up what he wrote in that report.

    Deficits create a savings shorfall. People and government stop saving when we have budget deficits.

    This translates to a transfer of wealth. Talking point during the last election.

    When there is a transfer of wealth and savings by both private citizens and Government falls off then we end up with a trade deficit.

    More wealth transfer……..less savings…………………

    The more our wealth is sucked out of this country the more we have to borrow to maintain our standard of living.

    Moral of the story……..our deficits are eating up our capacity to save. Banks use savings to lend money. The reason this all transpired. The massive price of gasoline and oil that sucked the wealth out of every country and to the middle east.

    End of story.

    Conclusion…………Defictis are bad…….bad………bad.

  • Jim_Satterfield

    One thing to consider when looking at whether the traditional worries of crowding out are still valid. We currently deal in numbers so large for some financial transactions that they dwarf the U.S. deficit. One of them is the current value of outstanding derivatives. Multiple articles I found place this at over a quadrillion dollars. Other estimates from just a couple of months ago were placing this at $596 trillion to $694 trillion. Assumptions, old models and tradition somehow just seem to be failing to keep up with what the private sector is doing that dwarfs government effects. I question whether or not Mankiw and other conservatives adequately account for those kinds of huge numbers in the private investment market. Investment and liquidity are global now and while there is no guarantee how much of that will be in the U.S. there is also no guarantee that these funds will flee the U.S. either. Neither Europe or Asia are in that much better shape and there are reasonable arguments for believing that in fact parts of Europe are in worse condition than the United States.

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