Economist Argues The Deficit Isn't Issue No. 1

Economist Dean Baker, of the liberal Center for Economic and Policy Research, says politicians have it all wrong. He tells Steve Inskeep the federal deficit needs to come down eventually, but not yet. His recent writings have denounced politicians. He also criticized the media, including NPR, for focusing on the deficit.

STEVE INSKEEP, host:

The man we'll meet next is annoyed by the debate over the federal budget: Republicans and Democrats debating the budget deficit, mainly how much and how quickly to bring it down. The economist Dean Baker of the liberal Center for Economic and Policy Research says politicians have it all wrong. He argues the deficit needs to come down eventually, but not yet. His recent writings have denounced politicians. He's also criticized the media, including this network, for focusing on the deficit.

You seem kind of angry when you comment on the budget debate right now.

Mr. DEAN BAKER (Economist, Center for Economic and Policy Research): Well, to my mind, it's really incredible how we've had what I would consider a misdirection of public policy, because we've had a disaster in our face. I mean, the collapse of the housing bubble, we're sitting here with 25 million people unemployed, underemployed. It strikes me that should be top at number A, B and C in Washington.

INSKEEP: You're saying where are the jobs, basically, is the question you're asking.

Mr. BAKER: Exactly. And that's off the map. Instead, we're talking about we have to reduce the budget deficit. And not only is that wrong in the sense that it's not the right topic, reducing the budget deficit goes the wrong way, and it's not mystical. I mean, if the private sector spends money, if Microsoft or General Electric goes out and spends money, they pay people to work, that creates jobs. The government spends money, they're paying people to work, that also creates jobs. It's not mystical. This is really common sense.

INSKEEP: Although you can also understand why people would be concerned about the budget deficit. Borrowing more than a trillion dollars per year, year after year, is scary to a lot of people.

Mr. BAKER: I know, and that's that I blame the politicians, I blame the media, because I would say we actually want a larger deficit, because the point here is we have 25 million people unemployed or underemployed. The reason why we should be concerned about a deficit is it's crowding out private-sector spending, private-sector investment. You're really hard-pressed to tell that story right now.

We still have extraordinarily low interest rates. We have excess capacity in just about every sector of the economy. You'd be very hard-pressed to say how let's say the government were to spend another three or $400 billion this year. How would that crowd any substantial amount of private-sector investment? You'd be very hard-pressed to say that.

INSKEEP: Doesn't the evidence suggest the evidence of other countries suggest that at some point, people cease to believe that the United States can pay back as much money as it's borrowing?

Mr. BAKER: Well, there no doubt is some point. The question is what that point is. And I think there's been some research - and I think it's a little questionable - that argues that once the debt-to-GDP ratio gets to 90 percent...

INSKEEP: Let's explain that for people who are GDP is the annual income of the whole country. If your debt gets closer and closer to matching your annual income, that's considered a scary threshold.

Mr. BAKER: That's right. Now...

INSKEEP: And we're around that scary threshold, or we're getting closer to it.

Mr. BAKER: We could. Now, I've looked at that research, and I find it actually very questionable. So I'll just give you the most obvious case here, and there's a few others that would fit the same story. But the classic example here is Japan. Japan had a very low debt-to-GDP ratio through the '80s. Its economy basically collapsed '89, '90, when its stock and housing bubble collapsed, same matter that we just had.

INSKEEP: Right.

Mr. BAKER: After that, it ran large deficits. It built up a very large debt-to-GDP ratio. Now, it's economy has grown relatively slowly in the last, say, 10, 12 years. We could say that's because it had a high debt-to-GDP ratio, but I think that'd be very misleading. I think the reason why it has a high debt-to-GDP ratio is because its economy has been doing very badly.

INSKEEP: Although I'm glad you raised Japan, because just within the last few days, as you probably know, one of the major investment-rating services downgraded Japan's debt, which we'll explain for layman, basically means we don't trust Japan as much, and that means they're going to have to pay higher interest rates over time.

Mr. BAKER: I hate to question their judgment, but the people that are actually putting money on the line, investors that hold Japanese government debt, they're currently holding 10-year government debt at an interest rate of about 1.4 percent. If you thought Japan was about to go under, you'd be crazy to lend them money at 1.4 percent (unintelligible).

INSKEEP: You would charge a much higher interest rate to cover your risk.

Mr. BAKER: Exactly. That's just common sense.

INSKEEP: So how much more can the United States borrow, then?

Mr. BAKER: Well, I think we have a long, long way to go. In Japan's case, they're over 200 percent of GDP, and they're still able to borrow 1.4 percent interest.

INSKEEP: Meaning they have, in relative terms, borrowed more than twice as much as the United States has up to this point, and someone is still lending them money at this point.

Mr. BAKER: Exactly.

INSKEEP: I am recalling an occasion during the Bush administration when deficits were starting to rise. There were two wars going on. President Bush had approved tax cuts. There had been a recession, although it was coming back and then recovering. Deficits were climbing - not nearly as big as now, but they were getting into the hundreds of billions of dollars. And it was said that - Vice President Cheney at that time made the statement: Ronald Reagan proved deficits don't matter, that this was not the biggest thing that the Bush administration needed to deal with. Was Dick Cheney right?

Mr. BAKER: He was partially right. I don't think the deficit at that point was a big issue. I think there was a good argument as to whether the deficits were being well used. But could you make a strong argument that the deficit was crowding out a great deal of investment, I think you'd be hard-pressed to make that case.

INSKEEP: Dean Baker, thanks very much.

Mr. BAKER: Thanks for having me on.

INSKEEP: He's of the Center for Economic Policy and Research.

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