How deficits matter

Dick Cheney has been much-quoted (and much-excoriated) for claiming that, "Deficits don't matter." The quote never offended me, however, since I interpreted Cheney to be making a statement about the political impact of deficits rather than the economic impact of deficits. I agree with Jonah Goldberg that politically Cheney may well be right: voters can't tell the difference (and thus don't care) about whether the deficits are merely humongous or downright mind-boggling.

Whatever you make of this political argument, the economic consequences of our burgeoning millionaire-tax-cut deficit are becoming increasingly clear, as this Brookings study shows:

the sustained deficits facing the nation will impose significant economic costs.... The unified budget deficit over the next decade is projected to average about 3.5 percent of GDP.... Our results suggest that these deficits will reduce annual national saving by 2 to 3 percent of GDP. As a result, by the end of the decade, the assets owned by Americans will be lessened by roughly 20 to 30 percent of GDP compared to their level if we balanced the unified budget over the next decade. Those missing assets will reduce national income by 1 to 2 percent in 2015. The increase in unified deficits will raise interest rates by 80 to 120 basis points.

The key thing for the Democrats to emphasize is that the consequences of large deficits constitute, in effect, an undeclared tax on the wealth of the middle class.

The political question is whether Americans, four or eight years hence, will understand that the painful interest rates and inflation they will by then be experiencing are the result of the shameful tax policies that the Bush regime pursued in the first years of the twenty-first century. Democrats beware: Bush partisans are already hard at work on the Op-ed pages of the Wall Street Journal to cover up his responsibility for creating economic conditions very like the ones in the 1970s that brought us a devalued dollar, higher interest rates, higher inflation, and slower growth.

I have confidence that in the long run the right people will get charged the political bill for what's happening in this country. After all, Americans in the 1970s did (vaguely) recognize that the stagflation of that time was the direct result of the deficits run up during the heyday of the Great Society and the Vietnam War. The Republicans were able to exploit this awareness to foment a backlash against the welfare state. Here's hoping that the same will happen in reverse.