Thursday, February 07, 2008

Deficit Problems

I'm not balanced budget fetishist, but roughly speaking in good economic times the government shouldn't be running more than a modest deficit. We may find out soon why this is sound advice. Bernanke can keep lowering interest rates, but long term rates are set by the magical market (short term rates can affect, but no control, long term rates). Any stimulus package is going to involve more deficit spending, and though I've been holding my breath for years waiting for this to happen and it hasn't, more government borrowing could lead to higher interest rates.

In other words, when there's too much deficit spending in good times your actions are somewhat constrained in bad times.