When will voters care about the deficit?

By R.A. | LONDON

A LOT of folks in Washington are busying themselves talking about America's federal deficit and debt issues. The deficit has obviously been forced to the front page by the sense that bond markets have had it with America's borrowing:

Come to think of it, markets don't seem that frightened of American debt, do they? But of course, public outrage over government red ink is also driving the issue to the forefront:

Huh. It actually looks as though the public doesn't care about the deficit either, at least relative to the state of the general economy. So why is the deficit such a big issue right now, at least in Washington?

The short answer is that President Obama has given the press a nice news peg in the form of the impending release of a report from his deficit reduction commission. Another question, then, is why the president felt the need to appoint a deficit reduction commission. And the answer there is some combination of "the deficit actually needs to be addressed" and "the president felt there was a political weakness that needed defending". Why the president felt a weakness on deficits is another, mysterious issue. While the deficit has risen significantly on Mr Obama's watch, much of the rise has been due to economic weakness, and one would have thought that the Republicans would have lost all deficit credibility after their performance during the Bush administration. But that's another matter.

The deficit actually needs to be addressed. As the economy recovers over the next couple of years, the deficit will decline. It will only decline, however (and depending on what Congress does), to the nearly but maybe not quite sustainable range of 3% to 5% of GDP, and it will then begin rising again around mid-decade, thanks mostly to increasing entitlement spending. By the end of the decade, America's debt-to-GDP ratio will be at troublingly high levels. And at some point between now and then, probably in a couple of years when America's economic slack has largely tightened up, interest rates will rise. Depending on how high and how fast they rise, America's economy will experience something between a slight drag on growth and a serious crisis.

All right, so America has both medium-term and long-term budget issues that need to be worked out, and the medium-term issues should ideally be worked out within the next couple of years. But there's no real sense in which the deficit is an emergent issue in America, in the way that a 9.6% unemployment rate is. Voters must be a little perplexed by the obsession with deficit issues. Either that, or they're internalising the view that fixing deficits is somehow emergent and/or crucial to economic recovery. But then you'd expect more people to put deficits high on their list of top concerns.

There is a very sensible view of deficit issues, broadly embraced by The Economist, which entails medium-term deficit reduction as a means to create the fiscal room for more stimulus. Take the bond market vigilantes out of the equation, and there's no way for stimulus opponents to cite bond market vigilantes as a reason to oppose stimulus. Peter Orszag has made a monetary version of this argument, suggesting that if medium-term fiscal issues were dealt with then the Fed wouldn't have to work as hard to hold rates down and there would be less fretting about debt monetisation.

As I said, these are sensible views. If I could point out troubles with them, one would be that, other than always just around the corner, it's difficult to spot any American bond market vigilantes. (They're all on holiday in Dublin.) The other would be that polling consistently finds that Americans are much more concerned about the economy than about the deficit. And it's a little difficult for me to spot the political path that runs from the present position through tackling the thing Americans aren't worried about and then on to handling the thing Americans are worried about. Maybe there's a path there, but it's sufficiently poorly marked that you're likely to lose your way before reaching the final destination.

Meanwhile there's this other route that looks relatively straight and clear. Boost growth now, through fiscal expansion if possible. The more rapidly you boost the economy, the sooner government debt looks like a lousy investment relative to other options and the sooner rates rise, giving deficit hawks an actual threat to point at. The more you boost the economy in the short run, the bigger a cushion there will be to protect against the contractionary impact of forthcoming austerity, and the bigger a role the natural winding down of automatic stabilisers can play in deficit reduction. And of course, by tackling the economic situation, one frees the voter's mind to concentrate on other issues—like the deficit. Who knows? In a couple of years' time, voters might actually be worrying about red ink.

Obviously, there are downsides to this approach, the biggest of which is a failure to insure against a sudden turn in market sentiment against American government debt. A responsible, reasonable, forward-looking government would clearly go for the pre-emptive consolidation planning. But suppose one lacks a responsible, reasonable, forward-looking government? Suppose legislators leap blindly from issue to issue, depending on what looks at a particular moment like the greatest threat to their electoral prospects? In that world, I'm not sure the clearer path doesn't promise better odds at achieving both strong recovery and eventual deficit cutting.