A Guide to the Deficit Aviary

By Rose Cahalan in May|June 2012, Special on April 26, 2012 at 8:35 am | 12 Comments

UT professor James Galbraith is drawing attention for his unconventional position on the U.S. deficit. Galbraith and his fellow “deficit owls” stand apart from the better-known deficit hawks and deficit doves. Hawks think we should act now to reduce the deficit; doves think we should act later. Owls, by contrast, think the deficit isn’t a problem, now or later; it’s just a natural part of growth.

The Alcalde is introducing the concept on its “Big Idea” page of the May|June issue. Here Galbraith explains in more depth what it means to be a deficit owl.

The Alcalde: What is a deficit owl?

Galbraith: A deficit owl believes that the deficit is a result, not a cause, of economic difficulty, and that it’s not something policy should work on directly. In my opinion, the deficit is a symptom, not a disease in itself.

This position is nothing new—it’s only the terminology that is new. The hawks vs. dove language has dominated the conversation for years now, but in reality it has always been a more complex, less black-and-white debate than that. So I’m pleased that this owl terminology has cropped up, because it may be able to help broaden the conversation. This is a question of who’s up and who’s down in various economics departments. The owls go back to a long tradition, starting with John Maynard Keynes.

The Alcalde: What’s the difference between a deficit dove and a deficit owl? Both groups advocate a hands-off approach.

Galbraith: The difference is that the doves say although the deficit is not a problem now, it’s certainly going to be a problem in the future. So they say we should have a stimulus policy now and prepare by cutting back long-term programs.

The Alcalde: Why do you disagree with the doves?

Galbraith: There are two problems with the doves’ approach. One, there’s no evidence that the world is going to have a major problem caused by this question of the deficit. That’s a supposition based on highly unreliable computer programs. And two, if you wanted to do something today about the future budget, the only way to do that is cut vital programs like Social Security and Medicare. You can’t cut things like the defense budget, because that’s decided in the future. So the doves’ formula is one that leaves Social Security and similar programs at great risk.

The Alcalde: What’s the most common misconception about the economy?

Galbraith: The fear that we will go bankrupt. The concept of bankruptcy doesn’t apply to a country like us; the U.S. is going to be just fine, long-term. Europe is another story, because the coordinating mechanisms between countries there are dreadful. The U.S. is more resilient than it may look.

My message is the financial position of the U.S. government is far stronger than a great many people think it is. Recently we’ve been seeing this notion that we’re heading toward some unprecedented, apocalyptic territory. You saw that with the panic over the debt-ceiling issue last summer. But the people who were actually buying and selling treasury bonds weren’t flustered in the least. In fact, bond rates went down.

The Alcalde: What’s your five-step plan for economic growth?

Galbraith: Good question, because I do actually have a five-step plan:

1. Concentrate on restructuring and reforming the financial sector, which was a major source of the crisis. It’s still not fixed.

2. Reduce our reliance on oil. This is a tough one to fix, and I don’t believe in miracle cures, but we have to find alternatives.

3. This step has three components—all relatively small changes that would affect many people. One, let’s recognize that a lot of unemployed people—older people—will not get new jobs. Offering them early retirement would open up jobs for younger workers.

4. Next, let’s raise minimum wage, which discourages undocumented workers.

5. And finally, a right-to-rent law. This would say, if your house is in foreclosure, you can stay in the house and pay rent set by a neutral party and then buy it back in a few years if you wanted, if you could. That would change the incentives facing the banks, which are dragging out this process. They would have a much stronger incentive to renegotiate than they do now.

Think Galbraith is onto something? Vehemently disagree? Share your take on deficits and the economy in our comments section.

Photo by Eduardo Deboni

Tags: deficit, deficit owls, economics, galbraith