"We Can Absolutely Afford Gridlock And Delay On The Long-Term Budget Gap"
There’s some stuff I agree with and some stuff I disagree with in the Alan Simpson / Erskine Bowles op-ed touting the thus-far-nonexistent Senate “Gang of Six” proposal for closing America’s long-term fiscal gap. I’ll just observe that it says a lot about the mentality of DC deficit mania that we’re running op-eds urging politicians to embrace the Gang of Six plan even before the Gang of Six actually has a plan. Strange, right? The substantive argument they advance for this is that “we simply cannot afford gridlock and delay as each party stubbornly holds out for its ideal solution.”
This is, however, mistake. DC seems to have forgotten why it is that deficits are a problem. But there’s an actual reason. The reason is this. All else being equal, the more the government wants to borrow the higher, the interest rate it has to offer savers. And the higher the interest rate a saver can get from the government, the higher the rate he’ll demand from any other potential borrower. And those high borrowing costs end up depressing consumer purchasing and new business activity. An entrepreneur might have an idea that’s profitable at 6 percent interest but not profitable at 11 percent interest. If you push these things into the “not profitable” zone, then you have a problem.
This is a real issue, and ever since Ronald Reagan brought persistent peacetime deficits to America, it’s an issue we’ve sporadically had to deal with:
This is why we had substantial deficit cutting deals early in the Reagan administration, midway through the GHW Bush administration, and early in the Clinton administration. Interest rates were high and spiking, the threat of crowding out was real. But today? Really? It might be in some sense preferable to have a long-term budget deal in place. But it’s hard to say in what concrete ways this would improve any current problems. We’re just not—not—suffering from unusually high interest rates and crowding out.