perfidy

W's policy of "cut taxes, increase spending" is just bizarre. Let's say there's some merit to the approach. What it says is that there's going to be an increase in growth that will overtake the deficits and render them unimportant. There's two things working against that.

1. It ain't happening. Growth is decent, but deficits are WAY ahead of growth.

2. Interest rates will rise, both under the direction of the Fed and because of increasing trade deficits (which are financed by bond sales, mostly).

So I have two problems -- it cuts taxes on people who don't need it, and without the corresponding spending cuts it's a boondoggle. What I don't understand at all is how the responsible Republicans have been swept to the side...what ever happened to the party of fiscal discipline?

Johno -- You're right: there's more than one way to define "big." Though I don't understand why 2 standard deviations from the mean is controversial, since it's standard in statistics. Anyways, given the data on deficit size over the last 40 years, what do you define as large?

[url=http://www.cbo.gov/showdoc.cfm?index=1821&sequence=0]http://www.cbo.gov…]

Ross -- You're right: some conservatives say "deficits don't matter." But they're wrong, and I don't agree with them. You'll note I give both sides of the argument, and say very clearly that deficits are harmful if big enough. And given that the deficit has grown every year W's been in office, we're probably headed into harmful territory soon. All I'm trying to do is teach people how to know when we're in trouble.

Andrew,
I haven't answered yet because I'm trying to find a way to say "you got me" without saying it. Touche'.

Anecdotally speaking, a "large" defecit is one that, when quoted, makes all my sphincters clench reflexively. We're getting there. (not to scientific, I know, but so far in life the sphincter test has served me well).

"So how large is “large”? Over the last 42 years the average deficit has been about 2.1 percent of GDP, with a standard deviation of about 1.9 percent (see here for data). Given this, a statistically reasonable criteria for calling a deficit “large” might be: one that’s two standard deviations from the average, or about 5.9 percent of GDP or larger."

Well... first you have to accept that definition of "large," and one thing I strongly dislike is when economist types clear the table by saying or implying "assume that..."

Watch me go! Assume that to be "in poverty," each member of a family of four must eat on average less than two meals a day. Assume that by "meal," we mean consuming at least 350 Kcal in one sitting. Therefore, "below the poverty line" shall consist of all individuals in a family of four consuming less than 700 calories per day. Hey! I just solved poverty!

Not to be snarky, but I think that the linked article is linked to too little "other stuff" to explain much.

Ye gods. It matters not one whit what an "acceptable" deficit is, if one does not consider the starting position. We're currently somewhere north of 40% of GDP in accumulated deficit. Bush is growing it at 6% a year, currently, which means over 10% increase, per year, in servicing costs. If GDP growth outruns deficit growth, you're OK. If not, you're in big trouble. Bush inherited a deficit growing substantially slower than the GDP. He's flipped it around, and made the problem dramatically worse.

There are two major problems looming at the moment:

1. Social security outlays are about to dramatically rise. The general fund is no longer going to be subsidized by social security, and is theoretically required to begin covering the "loans" it took from the pool.

2. Further Bush tax cuts, announced in the past few days, make the problem worse, extending the deficits by hundreds of billions.

The real question is, do breaking points exist? If we push that deficit up over 50%, and suddenly there's a rise in interest rates, what happens?

If you're arguing that deficits don't hurt, then outline your solutions. The deficits are financed by the sale of bonds. The interest rates on those bonds are dictated by the market. If the market perceives that the bonds aren't going to be paid back, then interest rates will have to rise. China buys a ton of these bonds right now, to make up for the trade deficit.

If the interest rates rise, the percentage of each tax dollar that goes to servicing the debt is going to rise substantially. And that means less money for the general fund, which is already getting slammed by reasons 1 and 2, given above.

You know all those crazy little places down in South America that end up in hyperinflation, and have nutso finances?

If your only logical defense of the non-existence of a deficit problem is "It can't happen here", it's a pretty pathetic position.

This "deficits don't matter" crap is from the same party that gave us "global warming isn't happening" three years, and just quietly (and fully) conceded that particular point. They also gave us WMD in Iraq, and fear as a way of guiding the actions of society as a whole.