The deficit/debt as national security "threats"
Friday, June 25, 2010 at 12:05AM 
James Galbraith in the LA Times, by way of WPR's Media Roundup.
He takes on the notion that the deficit is now a national security threat, a notion the Obama administration raised in its new National Security Strategy.
Was World War II, for example, won with balanced budgets? No. Deficits ran about 25% of GDP every year of the war, and the national debt had reached 121% of GDP by 1946. Was the United States weakened by this? Hardly. America had never been stronger than it was in 1946. And afterward, the economy didn't implode. The debt-to-GDP ratio merely declined, year after year, until it reached a low of about 33% of GDP in 1980.
Was America stronger in 1980 than in 1946? No again. That year we elected Ronald Reagan, who campaigned on a promise to restore the United States to a position of strength. To that end, he promptly cut taxes and boosted military spending, actions that pushed the deficit back up to about 50% of GDP even as the economy recovered.
It's true that nowadays China, Japan and other countries hold large piles of Treasury bonds. But why? Only because they run trade surpluses with the whole world and have chosen to stockpile those earnings in dollars. This is a sign of confidence in us. And reducing budget deficits wouldn't change anything about that, unless those Asian trade surpluses were also reversed. But the folks at Brookings weren't calling for a trade war with Asia, just about the only step (however unwise for other reasons) that might plausibly cut the surpluses.
Do China's debt holdings give China leverage over us? Not at all. Realistically, China can do nothing with its Treasuries except roll them over. China is not going to dump U.S. bonds in order to buy those of Spain or Greece. And paying interest on them is not, for us, a burden, since the money is never spent and probably never will be.
Speaking of interest, it's also obvious that the capital markets don't take the deficit scare-talk seriously; otherwise, they wouldn't be lending to Uncle Sam for 30 years at just over 4%. And the dollar wouldn't be rising, as investors seek safety from the European crisis in Treasury bonds — a sure sign that the world's wealthy don't find U.S. deficits all that worrisome.
The danger? The old bugaboo by which Social Security and Medicare are whacked to pay for increased military spending.
I like the contrarian attitude here.
Reader Comments (3)
Just one more step.
The majority of that deficit can be traced back to Wall St Banks.
The deficit/debt as national security "threats", what about the
cause? Doesn't that make the Wall Street Banks a national security
threat?
Gerald
Series 3 and 7
Wow. I feel like I just read something written by John Belushi's character in Animal House.
It wasn't over when the Germans bombed Pearl Harbor, either.
I wouldn't challenge the debt from a national security point of view - I'll agree with the author on that count, the Chinese are bound to our fate. But from an economic standpoint, what we're doing with our profligate spending is suicidal. It's delusional to comparison now to post-WW2 and come to the conclusion that "huge debt/GDP ratios are ok"
It is predictable for Gallbraith, a Keynesian, not to be too worried about the the public debt of the US as a % of GDP, for a good reason, since we are the go-to reserve currency, and still arguably the most competitive economy in the US, despite debts projected to further increase as a % of GDP. A country like Greece does not have this escape, while Japan is frankly an outlier, although they do have large exports.
But there is a limit to printing money and monetizing debt. We cannot raise taxes (I hope), and so we must print money...which is why excessive deficit spending is never a good long term economic policy since it effectively devalues the purchasing power of each dollar over time.
Cutting government spending is so hard. When Milton Friedman started talking about Government spending, we were at 40% of GDP in 1979. By the Clinton years, and the Bush years, we accomplished something like 35% of GDP, and we are headed back to 40%.