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May 14 / Jonathan

James Galbraith: The danger posed by the deficit ‘is zero’

Ezra Klein – Galbraith: The danger posed by the deficit ‘is zero’

Galbraith: The danger posed by the deficit ‘is zero’

James Galbraith is an economist and the Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas at Austin. He’s also a skeptic of the prevailing concern over America’s long-term deficit. With many people now comparing America’s fiscal condition to Greece, I spoke with Galbraith to get the other side of the argument. An edited transcript of our conversation follows.

EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: No, I think the danger is zero. It’s not overstated. It’s completely misstated.

EK: Why?

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn’t be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

So there are two possibilities here. One is the theory is wrong. The other is that the market isn’t rational. And if the market isn’t rational, there’s no point in designing policy to accommodate the markets because you can’t accommodate an irrational entity.


2 Comments

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  1. Laurence R. Hunt / Jun 11 2010

    How about let’s NOT design policy to accommodate the (irrational) market, but let’s design policy to create a stable economy, and let the market adjust on its own (freely AND irrationally). In my view, the problem of the past two decades has been shaping policy around market moves. Rather, let the market move around policy – we have had it backwards. Low interest rates punish savers and fuel speculation, and when speculation becomes the lifeblood of the market, well, you’ll have irrationality for sure! The “market” will not like economic sanity, but the longer we put off the day of decision, the greater the imbalances grow – as perhaps the past 20 years has already shown. And – long-term interest rates will climb. We are just talking about glaciers here. There are vast rivers beneath the surface of the glaciers, and they are masked by the glaciers’ comparatively limited rates of movement. But at some point, the glaciers break off – and at some point, long-term rates will rise – and the US government will be forced to balance the budget. If anything is a demonstration of the long-term principles of karma – it is the market. And then suddenly it looks rational again – the corrective process in action!

  2. Jon / Jun 13 2010

    THE USA is an utterly corrupt government to the core, the people of the USA are nice, blind sheeple in the Titanic…
    The USA is a failed state and a failed experiment, given the last ten years…and the inside job of 9/11… wall to wall…
    The USA should end all wars and bring all its troops home pronto, the world is getting tired of your shenanigans and your ZOG, Zionist atrocities.
    Canada is by the way on the same path, it is Zionist occupied government for now…. with Neocons everywhere…..

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