Some important truths about the federal deficit

Economist Dean Baker has a fascinating post at the CEPR blog entitled “A Tale of Two Deficit Charts.” In it, he explains how both Repubs and Dems have been guilty of promoting misleading stories on the origins and future of the federal deficit. The real culprit, Baker argues persuasively, was/is the collapse of the economy that was precipitated by the bursting of the housing bubble.

 Here is the excellent conclusion:

“In short, the real story of the deficit is the story of the economy, which is the problem of letting a housing bubble grow unchecked. The housing bubble was largely kept out of policy debates prior to the downturn, with the then-modest deficits getting far more attention in the media.

Remarkably, even after the collapse of the housing bubble has both wrecked the economy and led to large deficits, there is still little interest in the media in the underlying imbalances that led to the bubble. At the top of this list would be the over-valued dollar that led to large trade deficits. These trade deficits created a gap in demand that was filled by the stock bubble in the 90s and the housing bubble in the last decade.

But that discussion makes both the Clinton administration Democrats and the Bush administration Republicans look bad. As a result, we tend to get a lot more advocacy than accuracy in our policy debates about federal deficits and debt.”

You can read the entire post by clicking here.

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