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.