YOU CAN ALREADY hear the question: Why keep worrying so much about the budget deficit? The American economy is adjusting to it, the suggestion goes, and things are running smoothly -- so set aside your petty obsession with government bookkeeping and try to enjoy prosperity like everyone else. For 40 years, according to one view, the deficit has been an indispensable stabilizer for the economy; it's an old friend. Today we publish a letter from a reader, Irving Zuckerman, who deplores the repetitive attention to the deficit that he finds on this page, and he raises a couple of good sharp points that deserve comment.
It's true that inflation rates came down while the deficit went up in the years 1980-82. There were two recessions in those three years, of which the second pushed unemployment to the highest level since World War II. We have been arguing in this space that if the country had gone into those recessions with lower deficits, it would have come through them with lower interest rates and therefore less pain.
It is also true to say that interest rates can sometimes fall while the deficit rises. That happened most spectacularly in the summer and fall of 1982, and the reason was, once again, the recession then approaching its trough. The rising deficit, in classic fashion, then pulled the economy into a rapid recovery. But now, nearly three years into that recovery, the budget deficit is as large as ever. That helps explain why long-term interest rates are still over 10 percent a year, at a time when inflation is down to 4 percent. If the deficit were lower, interest rates would be lower. But American interest rates have to remain high enough to draw in foreign money to finance current borrowing, both public and private. Americans don't save enough to finance it themselves.
There are three good reasons to keep worrying about the federal deficit. First: the interest on the federal debt is taking a large and rapidly increasing share of the budget, preempting public resources far better spent on public services.
Second: it is burdening the country with a large foreign debt. Paying interest on it will affect American living standards for the worse.
Third: if the country goes into the next recession with a big deficit, it cannot risk letting the deficit expand in the normal fashion to generate a recovery. The United States went into the 1980-82 recessions with a deficit less than 2 percent of GNP, and came out with a deficit over 6 percent. If it goes into the next one with the deficit at 6 percent of GNP, would any president dare let it swell to 10 percent? That threatens uncontrollable inflation. But not to let it expand would mean enduring a recession far worse than the one in 1982. Not to worry, you say?