Yes, It's Monday Morning And Robert Samuelson Is Worried About Budget Deficits

It's amazing how Samuelson can continue to push his concerns about the budget deficit when all the evidence points to it not being a problem. In his latest tirade he tells us the problems of the deficit:

"First: As government debt piles up, it increasingly crowds out private investment. This, in turn, weakens productivity growth, which is a major source of higher living standards. With interest rates now so low, this doesn’t seem a problem — which is why it is.

"Second: The truly scary possibility is a run on the dollar. If huge budget deficits subvert global confidence in the dollar — causing investors to dump the currency — restoring that confidence might require deep cuts in federal spending and steep increases in taxes."

Okay, that first one is a real head scratcher. The classic story is that large budget deficits lead to high interest rates, which then crowd out investment. That slows productivity growth, which makes us poorer in the future.

The problem with this story in the current environment is that interest rates are not high, they are extraordinarily low. The interest rate on the 10-year Treasury bill is hovering around 1.7 percent. That compares to rates around 4.5 percent back in the late 1990s when we were running budget surpluses. (Inflation is the two periods is comparable, so comparing the nominal rates gives us a rough comparison of the real rates. Samuelson acknowleges that rates are low, which he says is why the budget deficit is a problem.

This is a bit like being accused of murder, then bringing in the alleged victim alive and healthy, and then have the prosecutor tell you that this is the problem with your defense. Okay, this is loony tune land. If interest rates are low, they cannot be crowding out investment: full stop.

The run of the dollar story is also problematic for anyone who gives it a moment's thought. The real value of the dollar is actually quite high now, about 20 percent higher than it was a decade ago. Let's say that it fell by 20 percent to its levels of 2010, would that be a crisis? That's a bit hard to see.

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