The Bond Markets And Deficits

That Big Fat Budget Deficit. Yawn.
I expect taxes to be increased in the next few years, the question is in what form and will it be combined with spending restraint and reform of entitlements. For the short term, the deficits don’t seem to be impacting interest rates in the bond markets.

Perhaps they won’t. The economy could indeed outgrow these deficits over the next decade. In fact, the Congressional Budget Office, a nonpartisan research arm of Congress, is forecasting that surpluses will return in 2014.

But many economists also say the rapid fiscal swings of the last 20 years have created a false sense of security about deficits. That serenity may have been reinforced by a series of accounting decisions in Mr. Bush’s new budget that mask the deficit’s true size, according to budget analysts.

THE absence of concern is all the more alarming now, given the enormous shortfalls in Social Security and Medicare that await in coming decades, economists say. “If the 80’s deficit had gone away on its own, that would be one thing,” said Benjamin M. Friedman, a Harvard economics professor.

He noted that the long economic expansion of the 1980’s did not bring down the national debt. Only after the first President Bush raised taxes, President Clinton raised them further and the Republican Congress of the mid-90’s reduced spending growth did the deficit vanish. “And the people who took those tough actions didn’t necessarily get rewarded for them,” Mr. Friedman said.

Before the first President Bush broke his “read my lips” vow and increased taxes, the Republicans had won three consecutive presidential elections; they have not won the popular vote since. The controversial 1993 federal budget, meanwhile, contributed to the Democrats’ loss of control of the House of Representatives, which they had held since 1955.

Those political costs do tend to stick in people’s minds, and they have made a budget reckoning all but unthinkable during an election year. Barring truly spectacular and surprising economic growth in coming years, though, the reckoning is likely to come eventually, even if there is little hint of it in today’s bond market.

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