For a while now, I (and practically everyone else) has been saying that the deficit is making us nervous. Not the current deficit, but the future ones. I don't think that we should run any deficits outside of national emergencies, and while I think the current economic mess qualifies, I don't think 2019 does.
Economically speaking, I think an economy growing as fast as ours can sustain a budget deficit in the neighborhood of 3% of GDP almost indefinitely. To be clear, I don't think we should sustain such a budget deficit--if we want programs, we should pay for them ourselves, not ask our kids to. But it is possible to run such a deficit without fiscal crisis or economic stagnation.
But three percent is around the ceiling of sustainable deficits. Six percent is well above that ceiling. At six percent, your debt service burden starts growing much faster than your tax revenues.
On the other hand, the markets don't seem to care, as Paul Krugman points out:
And right now, deficit-phobia has quickly congealed into the latest CW. You can see it in editorials (not from the Times, I'm happy to say, but almost everywhere else), in what the talking heads say, even in supposedly objective news reporting. Not a day goes by without my reading some assertion that "markets are anxious/jittery/worried about the deficit" -- an assertion based on no evidence whatsoever. (Long-term interest rates on US debt are near historic lows; CDS spreads show no concern about default.)
Matt Yglesias adds:
It's really maddening that at the same time preposterous idea like strong forms of the Efficient Markets Hypothesis continue to be respectable that people seem unwilling to trust financial markets to accurately convey the beliefs of participants in financial markets. I would add to Krugman's observations the fact that we have Cato's Chris Edwards blaming anticipating inflation for the lack of private investment when the TIPS spread shows that markets aren't anticipating inflation.Right now economic conditions are bad. And the budget deficit is high. So I find it understandable if the man on the street chooses to conclude that the budget deficit is causing or contributing to the bad economic situation. But people writing about these matters ought to know better--interest rates are low and markets are assessing both default risk and inflation risk as low. So what about the deficit is supposed to be causing the problem?
I join with Messrs Yglesias and Krugman in a number of points: