The deficit as political football | Free exchange | Economist.com: THERE is no question that there are serious budget issues facing the American government. As the Congressional Budget Office noted last week, without major reforms government spending will ultimately grow to eat the economy due to nothing more than demographic change and rising health costs.
But it's important to note that this is a long-run budget problem. The wars, tax cuts, and economic interventions of the past decade will increase the size of the debt significantly, but there is no sign that these increases have shaken market faith in America's ability to service its debt. What will ultimately shake that faith are clear signals that the American government is unable to adequately address its growing structural budget issues. That may become an issue, but there's no particular reason that it must become an issue this year or next. As Brad DeLong says:
It is, I think, much too early to be worrying about closing America's structural deficit through any policies other than trying to set health care cost-containment in motion. Recession-fighting should be the agenda for 2009-2010. Structural balance should be the agenda for 2011-2012.
But Mr DeLong links to Ed Luce, who sees the political shadow cast by large deficits....
I actually don't buy the story Mr Luce presents; Americans may say they care about deficits, but it's not the kind of caring that will resonate at polls like actual economic conditions. A slumping economy is by far the bigger threat to Democratic prospects in 2010 and 2012 than budget issues.
But that doesn't mean that deficits aren't dangerous politically. A more plausible scenario is that grandstanding moderates of both parties will use budget issues to extract concessions on key pieces of legislation—including health care, or another round of stimulus—which may ultimately undermine recovery or deny the administration key legislative wins. The Congress is a peculiar institution, one which may derail stimulative measures in the short term, and structural budget reforms in the longer term.
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