Everyone agrees that the exploding budget deficit, estimated at $1.8 trillion for this year, represents a huge negative for the economy.
But there is sharp disagreement about how quickly the deficit should be trimmed.
Deficit hawks say it must be sliced quickly to avoid a huge debt burden, spiraling inflation, higher interest rates and a potential meltdown of the dollar.
But the doves say the deficit can’t be cut yet. They argue that continued government stimulus is necessary to ensure economic recovery. They also maintain that deflation is a bigger worry at the moment than inflation.
As for the hawks, they say that foreigners are financing much of the U.S. deficit. The danger is that foreign investors will tire of purchasing Treasury bonds.
“We are not an island,” Martin Baily, chairman of President Clinton’s Council of Economic Advisers, told The New York Times.
“We are part of the global economy, and there are concerns out there among those who have been buying our debts that we owe too much.”
As for the doves, “we certainly have to tolerate the deficits we have now. Any effort to cut them now would be foolhardy and cruel,” Lawrence Mishel, president of the Economic Policy Institute, told The Times.
On the global policy front, G-8 leaders agreed Wednesday to delay withdrawing stimulus until their economies have recovered.
Exit strategies “will vary from country to country depending on domestic economic conditions and public finances,” the G-8 communiqué said.
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