Tuesday, October 21, 2008

Wayne Angell frets over deficit on Fox Business

Former Fed Governor Wayne Angell expressed concern over the deficit on Fox Business yesterday prompting FBN anchor Liz Claman to say, “Wayne, we’re so happy you are talking about the deficit because nobody else seems to be.”

That’s probably because the deficit is irrelevant.

This year’s deficit of $436 billion, while the largest in nominal terms, is smaller than the deficit of France, Germany and Japan and it is smaller than the deficit we ran in 2003 when viewed as a percent of GDP. However, the media doesn’t seem to want to put it in perspective.

The fact is, the deficit is too small.

History has shown that a deficit of at least 4 percent of GDP is necessary to pull us out of economic downturns. Reagan ran a deficit of 6.5 percent of GDP in order to get us out of the Volker recession in 1982. That was the largest deficit in the post WWII period. In 1991 the deficit ran up to 5 percent of GDP and that eventually turned the economy around. (Unfortunately not fast enough to help President George Bush 41.)

At $436 billion the deficit now is about 3.3 percent of GDP. Not until you see it reach somewhere around $700 billion can you say it is high enough to turn things around. And when it does hit that, don’t expect the misinformed media and fiscal conservative types to be cheering. But if you want a better economy, get out the pom poms.

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