When Will Voters Care About the Deficit?

Economics

When will voters care about the deficit?

Nov 15th 2010, 14:17 by R.A. | LONDON

A LOT of folks in Washington are busying themselves talking about America's federal deficit and debt issues. The deficit has obviously been forced to the front page by the sense that bond markets have had it with America's borrowing:

Come to think of it, markets don't seem that frightened of American debt, do they? But of course, public outrage over government red ink is also driving the issue to the forefront:

Huh. It actually looks as though the public doesn't care about the deficit either, at least relative to the state of the general economy. So why is the deficit such a big issue right now, at least in Washington?

The short answer is that President Obama has given the press a nice news peg in the form of the impending release of a report from his deficit reduction commission. Another question, then, is why the president felt the need to appoint a deficit reduction commission. And the answer there is some combination of "the deficit actually needs to be addressed" and "the president felt there was a political weakness that needed defending". Why the president felt a weakness on deficits is another, mysterious issue. While the deficit has risen significantly on Mr Obama's watch, much of the rise has been due to economic weakness, and one would have thought that the Republicans would have lost all deficit credibility after their performance during the Bush administration. But that's another matter.

The deficit actually needs to be addressed. As the economy recovers over the next couple of years, the deficit will decline. It will only decline, however (and depending on what Congress does), to the nearly but maybe not quite sustainable range of 3% to 5% of GDP, and it will then begin rising again around mid-decade, thanks mostly to increasing entitlement spending. By the end of the decade, America's debt-to-GDP ratio will be at troublingly high levels. And at some point between now and then, probably in a couple of years when America's economic slack has largely tightened up, interest rates will rise. Depending on how high and how fast they rise, America's economy will experience something between a slight drag on growth and a serious crisis.

All right, so America has both medium-term and long-term budget issues that need to be worked out, and the medium-term issues should ideally be worked out within the next couple of years. But there's no real sense in which the deficit is an emergent issue in America, in the way that a 9.6% unemployment rate is. Voters must be a little perplexed by the obsession with deficit issues. Either that, or they're internalising the view that fixing deficits is somehow emergent and/or crucial to economic recovery. But then you'd expect more people to put deficits high on their list of top concerns.

There is a very sensible view of deficit issues, broadly embraced by The Economist, which entails medium-term deficit reduction as a means to create the fiscal room for more stimulus. Take the bond market vigilantes out of the equation, and there's no way for stimulus opponents to cite bond market vigilantes as a reason to oppose stimulus. Peter Orszag has made a monetary version of this argument, suggesting that if medium-term fiscal issues were dealt with then the Fed wouldn't have to work as hard to hold rates down and there would be less fretting about debt monetisation.

As I said, these are sensible views. If I could point out troubles with them, one would be that, other than always just around the corner, it's difficult to spot any American bond market vigilantes. (They're all on holiday in Dublin.) The other would be that polling consistently finds that Americans are much more concerned about the economy than about the deficit. And it's a little difficult for me to spot the political path that runs from the present position through tackling the thing Americans aren't worried about and then on to handling the thing Americans are worried about. Maybe there's a path there, but it's sufficiently poorly marked that you're likely to lose your way before reaching the final destination.

Meanwhile there's this other route that looks relatively straight and clear. Boost growth now, through fiscal expansion if possible. The more rapidly you boost the economy, the sooner government debt looks like a lousy investment relative to other options and the sooner rates rise, giving deficit hawks an actual threat to point at. The more you boost the economy in the short run, the bigger a cushion there will be to protect against the contractionary impact of forthcoming austerity, and the bigger a role the natural winding down of automatic stabilisers can play in deficit reduction. And of course, by tackling the economic situation, one frees the voter's mind to concentrate on other issues"”like the deficit. Who knows? In a couple of years' time, voters might actually be worrying about red ink.

Obviously, there are downsides to this approach, the biggest of which is a failure to insure against a sudden turn in market sentiment against American government debt. A responsible, reasonable, forward-looking government would clearly go for the pre-emptive consolidation planning. But suppose one lacks a responsible, reasonable, forward-looking government? Suppose legislators leap blindly from issue to issue, depending on what looks at a particular moment like the greatest threat to their electoral prospects? In that world, I'm not sure the clearer path doesn't promise better odds at achieving both strong recovery and eventual deficit cutting.

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Poor logic. Just because voters don't rate the deficit as their primary concern doesn't mean they don't care about it. It's really no surprise that with unemployment as high as it is that the economy is rated the biggest issue.

Voters in Greece, France and Ireland didn't care about debt and deficits until this summer. Americans will care about it eventually, when the guv can't borrow any more.

I think this is a great blog post. The expressed worry about the deficit just seem incoherent. Tell people that one is going to cut policeman, or the military, or grandma's check, and people scream.

Obama's re-election likely depends on the economy improving. But their are huge interests which seem intent on undercut his ability to do so. My opinion is that the interests are a combination of those who do not like him, those who benefit from fear (the gold/commodities people), and a surprisingly significant number of less well of Americans who, at the risk of being condescending, don't understand their own interests.

The Red states want the Blue states to send them less money? Fine. The Red states, who my guess have a lot fewer millionaires than the Blue state, want more money to go to higher income people? Fine--but does not make a lot of sense.

I think the Blue States should form something like the Northern League in Italy, and start talking States Rights--seems like some reality testing needs to be done here.

"Either that, or they're internalising the view that fixing deficits is somehow emergent and/or crucial to economic recovery."

My impression from Republican statements is that it's a supply-side argument: an inarticulate sense that recent government expansions into finances/automobiles/medicine are crowding out the private sector despite the monetary stimulus of low bond yields. Of course, if one believes (or claims to believe) that federal government should be smaller anyway, then reducing the deficit is code for that.

R.A., I would like to play devils advocate and take your reasoning from the China currency debate with Krugman and apply it to deficits. Your main argument against Krugman's strong stance is that the small possibility of a trade war with China would be devastating to both economies. But, how about the small possibility that the bond markets turn on the U.S.? You admit that would be devastating to the economy, so why do you dismiss it as not a possibility to consider in the near future?

Sure, you can say that the chances are too small to worry about, but fundy correctly says that Greece and Ireland thought the same two years ago. And actually, I think I would tend to view any argument that the bond markets will always love the U.S. (even over the short term) in the same skeptical light of Krugman's "only good will come from standing up to China" talk.

They care about "spending" and thus about the "deficit" because they see it as making the economy worse and thus hurting jobs. That is the bill of goods they were sold during the last election cycle. I put "deficit" in quotes because most people are completely confused by the difference between the annual deficit and the national debt.

It's nonsense to argue that the current year deficit is hurting the economy now. The national debt is huge and it may become a drag on the economy in the future.

The GOP used confusion over the deficit and the debt to make voters feel that spending is out of control, but only certain spending, the kind that Congress controls in earmarks and "waste" and big government programs of some unspecified sort. We heard ads in NE that accused the Democrat of "massive spending / $500B in Medicare cuts" without any hint of cognitive dissonance. This has created a feeling that government can be cut dramatically without touching the entitlement programs and defense and veterans programs, which is utter nonsense. If the GOP had run saying "We need to cut Social Security and we need to cut Medicare," they would not have won many seats anywhere.

We have this false idea that government spending is hurting the economy. CBPP did an analysis last week of the effects on states of cutting the relatively small discretionary part of the budget left by 20% across the board. Every state would lose hundreds of millions of dollars and many would lose well into the billions. To pick a few examples, Arizona would lose about $900M, Missouri $592M, Michigan $1.1B, for a total of over $30B. That money would have to be then cut out of the state budgets and then out of local budgets. So shrinking the federal government means shrinking your local government.

If the GOP tries to shift the cuts so they don't reduce payments to the states, it would mean essentially eliminating things like national parks or the EPA or the FDA. If your state relies in any way on national park tourism, then you will get hit economically.

I think there is something to be said for addressing the issues early, where the pain can be spread over a longer period of time. The Economist (and its blog commentators) decry the irresponsibility and short-term thinking of politicians on a near daily basis; now that they are thinking long-term they're getting slammed as well. I guess you can't win.

I've noted that the 10 year bond price has been plunging for the last week; seems to have started when QE2 was implemented.

So much for the Fed contriving to push interest rates down.

"As the economy recovers over the next couple of years, the deficit will decline."

Maybe this was the administration's plan from the start. Appoint a commission, make superficial changes, then claim credit for the effects of economic forces beyond their control. It's similar to the political adage for dealing with a recession: Shovel snow all winter, then claim credit for spring.

It might be really enlightening to expand this kind of survey a little. For example, ask respondents to rank their concerns (or at least the top 3). It is entirely possible that the issue that ranked number 1 on first-place votes would end up dropping relative position as additional concerns were included.

There was a mayoral election just up the road where they used instant-run-off voting. The guy who got the most 1st place votes ended up losing to someone who was way behind on 1st place votes, once the second preferences of those who preferred one of the dozen or so other candidates got transferred. The initial leader also had "high negatives" -- a majority wanted "anybody but him."

Could something similar happen with this kind of survey? No reason why we couldn't discover that a plurality think jobs are the #1 most important issue. But everybody else ranks the deficit #2, and so it ends up being more important overall. Not necessarily, of course, but certainly not impossible.

Just wondering...

Did the Deficit Commission take into account the money the Fed Gov't will get from taxable - at retirement - 401(k)'s?

Will the Economist send thier staff out at 2 am on Black Friday to the "Black Friday lines" to conduct a YouGov Poll asking, "Are you living "paycheck to paycheck"?

Will R.A. slam Krugman's comments on the preview by the Deficit Commission? (I thought it was rather good, the "blind squirrel theory?") http://www.nytimes.com/2010/11/12/opinion/12krugman.html --- As to when voters will care... 10% don't care about the deficit (the unemployed) The Tea Party and Republicans do, but only after the rich get their tax cut extended.

Voters don't care now because they have seen the US debt rise, whilst the 10 year Treasury dropped from 5% to 2.8%

Thinking back... Didn't Greenspan tell Congress that those huge tax cuts were okay as long as they were paid for by spending cuts? So, we got the tax cut AND spending (Medicare Prescription Law). ---- Take the bond market vigilantes out of the equation...

Isn't that what the Fed is doing with QE2?

Boost growth now, through fiscal expansion if possible.

Not going to happen. This batch of elected Republicans have claimed to have "found religion". --- But suppose one lacks a responsible, reasonable, forward-looking government? Suppose legislators leap blindly from issue to issue, depending on what looks at a particular moment like the greatest threat to their electoral prospects? In that world, I'm not sure the clearer path doesn't promise better odds at achieving both strong recovery and eventual deficit cutting.

This is why business investment probably hasn't rebounded. The distractors will blame it on ObamaCare.

Regards

Voters will care about the deficit when their chosen celebrity demagogue tells them to. This will have nothing to do with finance or reality, but everything to do with election.

I can count on one hand the times I've heard/seen GDP growth rate mentioned in a debt/deficit discussion. I can't think of one time the next critical step has been made to equate GDP growth rate to federal borrowing cost. This is the essence of the argument and nobody gets it.