The Federal Deficit Matters Now More Than Ever

A decade ago, the US was deep into a misguided elite-driven freakout about the federal budget deficit. Back then, inflation was low, interest rates were low, and unemployment was high. In other words: There was no urgent reason to have a debate about ways to reduce federal borrowing.

Now the situation is transformed in every respect. And yet there is no serious political discussion about the need to cut the deficit.

Current unemployment is very low and has been low for a while. Inflation has moderated considerably but remains above the Federal Reserve’s 2% target. And curbing inflation required interest-rate increases that are putting real stress on the markets for housing, renewable energy and other capital-intensive goods.

So why the reluctance to talk about the deficit, much less do something about it? Paul Krugman, for example, who despite his reputation as a deficit enthusiast is in fact true to his Keynesian convictions, wrote last week that “now would be a good time to rein in deficits” but advised against spending too much time on the subject because “the chances of serious action on the deficit anytime soon are near zero.”

Pessimism about decisive political action on major problems is almost always warranted. There are a lot of veto points in the US political system, and a House Republican caucus that can’t even install a speaker is very unlikely to revisit GOP anti-tax dogma.

Can We At Least Talk About the Deficit