Watchdog Blog

Dan Froomkin: Asking the Emperor About Everything Except His Clothes

Posted at 12:02 pm, June 17th, 2011
Dan Froomkin Mug

Reporters covering the mad bipartisan scrum to reach some sort of agreement on federal deficit reduction have been painstakingly recording every detail of rhetorical posturing, noting every political up and down — and missing the real story. They’re not questioning the underlying assumptions, which make this whole exercise a counterproductive farce.

Dean Baker, the co-director of the Center for Economic and Policy Research, recently wrote in an opinion piece for the Guardian about the lack of rational arguments on behalf of what he calls “the faith-based economics of deficit reduction.” There was plenty of good advice in there for the Washington press corps.

Baker wrote:

[I]t’s worth asking how the proponents of deficit reduction think that lower deficits will lead to increased growth and job creation in an economy mired in a severe slump?

For instance, are they seriously arguing that lowering the deficit will reduce interest rates? Baker explains:

The interest rate on 10-year Treasury bonds is already down to 3.0%. Assuming a 2% inflation rate, this translates into a real rate of about 1%. How much lower do the deficit hawks think interest rates will fall if we were to sharply cut the deficit? Furthermore, how much more investment do they think we can induce even if we got a large reduction (for example, 0.5 percentage point) in real interest rates?

Do they think that this sort of decline in interest rates will send the dollar tumbling and thereby improve our trade balance? Against which currencies will a lower interest rate cause the dollar to fall sharply?

Are they, Baker asks, seriously arguing that if we lay off workers in the public sector, that will increase employment in the private sector? Baker shows why that is not a defensible position.

Or are they arguing that businesses have a “bad feeling” about the deficit and for that reason are sitting on their profits rather than investing them? Baker points out that the fear of higher taxes in the future is actually an incentive to invest now rather than later.

What is the coherent explanation for all this deficit hawkery? Shouldn’t we ask?

5 Responses to “Asking the Emperor About Everything Except His Clothes”

  1. Tim Messick says:

    Do they feel that allowing the Fed to regulate the flow our currency (printing away) verses the currency being tied to tangibles like gold or a type of productivity is working? Should we repeal Greenspan‘s recommendations to have the markets regulate themselves by diminishing Glass Steagall and supporting banking derivative packages to help control the fractional bankers while the middle class drowns in the wealth of the financial sector? Personally, I support the pain this country needs to endure in order to right itself, but the billionaires better be driving the bus or I’ll throw them under it. Shrink the federal government, balance the debt and allow the states to govern. The next time a government official tries to reinterpret the Constitution let them know they have an invitation to my woodshed.

  2. Darlene says:

    The whole philosophy on deficit reduction is not based on logic, but on ideology. If this keeps up you can kiss America bye bye. We will soon be a third world country overtaken by India and Chine.

  3. Gestion de patrimoine says:

    Deficit reduction is important for our children. We can’t let the debt grow, amerira has debt while china has too much money too invest… At the end, they will buy all the country as they do now in Africa.

  4. Don Greenwood says:

    Congress can threaten all the cuts they want, but until the cuts are proportionately spread throughout all government agencies and programs, until Democrats admit that pet entitlements have to be on the table, and until the Republicans decide to man up, ignore the limited government/tea party base and finally admit that raising revenue has to be part of the plan to reduce our deficits and actually pay for what we buy (including borrowing for two wars), this country will not achieve deficit reduction.

    As far is unemployment is concerned, it will continue to be a thorn in the side of whoever is in the White House, Republican or Democrat, and irrespective of what course deficit reduction takes. This nation as a whole has been on a spending spree for far too long. Individual savings need to increase, which means that consumer spending has to decrease. The Fed wants to open up the cash velocity to provide more credit, but can’t seem to encourage spooked financial institutions, who have done an about face since the meltdown of 2007 and 2008.

    Housing will continue to be flat due to a reality check that people who take out mortgages actually need to be able to pay for them, so wringing the excess stock out of the market will not happen anytime soon. Good luck in an economic environment where unemployment nudges double digits. Americans ultimately need to realize that they don’t actually own the house they live in unless they are able to pay off the mortgage, that their housing is a lousy investment, and that it shouldn’t be used as a bank.

    Compounding this malaise, states have many of the same problems as the Federal Government. It’s not an encouraging situation.

  5. Eric Roth says:

    Your skepticism is certainly appreciated, especially since the public opinion polls consistently indicate that reducing the unemployment rate and not the deficit remains the main concern of mere American citizens.
    Unfortunately, just as the Obama administration favors it huge corporate funders over mere voters, the mainstream media seem intent on helping their corporate advertisers and Wall Street owners more than their readers. Worse, the media have allowed both Obama and Congressional leaders to conduct the debate out of public view. What happened to transparency? Where is the genuine debate? Why is our political system so much more sensitive to corporate, Wall Street interests than the common good? What would Thomas Jefferson or Andrew Jackson make of the Democratic party today?
    Rather than sing endless hymns to bipartisan, backroom deal-making that hurts average Americans, the media should critically review the assumptions, proposals, and likely consequences of debt reduction ideas. And let’s not forget that elections were supposed to have consequences!

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