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Stan Collender: Six Questions About the Politics of the Deficit

Stan Collender has an excellent piece:

Nieman Watchdog > Ask This > Six essential questions about the deficit, Wall Street and Washington:

  1. For almost two decades we’ve been told that when you’re looking for signs of what Wall Street wants Washington to do about the federal budget, the bond market is the place to watch. What’s the bond market saying today? The bond market is... unequivocal... the bond market today is exhibiting no worries about the deficit or federal borrowing at all. In fact it’s indicating that Washington should do more to stimulate the economy....  
  2. Why are Congress and the White House ignoring the bond market now after feeling the need to follow it so closely before? In 1993, the bond market was threatening higher interest rates if the deficit wasn’t reduced, something elected officials could ignore at their own political peril. By contrast, the only threat the bond market can make now is to lower interest rates further, and that isn’t as fearsome to politicians....  
  3. What makes 2010 so different from 1993 for the bond market when it comes to the deficit? It’s simple: The economic situation today is the opposite of what existed at the start of the Clinton administration. In 1993, the bond market was worried about excess demand.... Having the federal government spend less and tax more... would cool rather than overheat.... The big concern today is about deflation and slow growth rather than inflation and overheating....  
  4. So if Wall Street isn’t demanding that the deficit be reduced, who is? In the current environment, the federal deficit is more of a political issue than an economic problem. It’s not surprising, therefore, that those demanding that the Obama White House and Democratic Congress reduce the deficit even in the face of the bond market’s insistence that it’s not needed are those who want to score political points by doing so. Look at the inflammatory language being used on this issue by the administration’s opponents and it’s easy to understand how much of what is being said is demagoguery rather than substantive policy analysis.... Blue Dogs are from fiscally conservative districts and are facing serious reelection challenges from Republicans who have made the deficits that have occurred during the Obama administration into a significant issue.... [D]eficit hawk groups are largely one-issue special interests, and pushing deficit reduction is what they do even when, as has been the case the past few years, a bigger rather than smaller deficit is economically justified.  
  5. Why do these groups and individuals insist that the deficit needs to be reduced? What’s in it for them? More often than not, the federal budget deficit is a surrogate for something else .... Over the past two years the rising deficit has also been used by Republicans as a symbol of excessive government spending and involvement in people’s lives. Even though deficits have generally been higher when Republicans were in the White House and in control of Congress, complaining about the nominal record highs that have occurred the past two years under a Democratic administration, House, and Senate has given the GOP the opportunity to place the blame elsewhere.  
  6. How is it possible that the politics and economics of the deficit are so different? The answer is: Ignorance. Polls, surveys, and other research demonstrate conclusively that the public exhibits little understanding about the federal budget, the budget deficit, and the impact of the deficit on the economy as a whole. This makes the situation ripe for the misleading statements, campaign slogans, and demagoguery that are typical of today’s U.S. budget politics.... The current situation is a prime example... deficit reduction would actually be harmful -- a repeat of Herbert Hoover-like policies that would prolong the slow recovery...

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