Republican conservatives are clearly not wanting to let the crisis of the deficit go to waste. I don’t trust them to reduce the deficit. They just want an excuse to drown the government in the bath tub as Grover Norquist once said.
However, I think writers like Paul Krugman who suggest we are in good place if we are close to where the debt to GDP ratio will be stable, ignores three things in being so optimistic. Jeffrey Sachs makes the same point.
First, it basically focuses on what level of deficit keeps debt to GDP constant. This assumes that the current debt to GDP level that we haven’t seen this high SINCE THE END OF WWII is what we find acceptable. The size of the debt level we have makes it harder to engage in fiscal stimulus to respond to any future recession.
Second, assuming interest rate eventually rise from their current level just that alone will substantially increase the deficit and the contribute to rising debt to GDP level.
Finally, even if we are coming close to an acceptable balance rising healthcare costs will continue to increase the deficit to a level to push federal debt to a steadily higher level. Health care reform may mitigate those healthcare costs, but only time will tell how much.
It’s true that there is no reason that the budget has to balanced. However, I think we should focus on a deficit level small enough that it slowly reduced the debt to GDP ratio, as we did after the second world war.
The best thing if for a democratic and liberal President like Obama to do this rather a Republican who just wants to slash the size of government for the fun of it. Obama being a fiscal hawk also like Nixon going to China. He’s in a better position to do because the skeptics of fiscal hawk ideas trust him.