Don't Underestimate The Deficit's Impact
The recent commentary on the federal budget deficit by Paul Craig Roberts ("The deficit isn't public enemy No. 1," Economic Viewpoint, Nov. 9) misses the point. His assessment of the impact of the deficit on the economy may be accurate, although I have a somewhat more negative view. Clearly, real interest rates would be lower if the budget were balanced, possibly as much as 1% to 1.5% lower. This would have a strong stimulative effect on the economy.
I also believe that the deficit is a drag on investment and that the recent recession could have been avoided if the budget had been near balance. The federal government could have used fiscal policy to stimulate the economy. Japan has run surpluses for years, and it is now able to use a $90 billion fiscal-stimulus program to combat the slowdown in its economy without having to worry about driving interest rates up.
Because the deficit is so large, it has sidelined fiscal policy and put the entire burden on monetary policy.
Vice-President, Senior Economist
Public Sector Consultants Inc.