Reagan Policies Gave Green Light to Red Ink (no impact politically)

[papau]

http://www.washingtonpost.com/wp-dyn/articles/A26402-2004Jun8.html

Reagan Policies Gave Green Light to Red Ink


By Jonathan Weisman Washington Post Staff Writer Wednesday, June 9, 2004; Page A11


The line is not likely to make this week's eulogies to Ronald Reagan, but when Vice President Cheney allegedly declared, "Reagan proved deficits don't matter," he summed up an enduring argument from the former president's economic legacy.<snip>

As important, they appeared to have no impact politically, said Stephen Moore, a conservative economist at the Club for Growth who worked in Reagan's budget office. <snip>

Reagan's "economic policy . . . was a disaster," University of California at Berkeley economic historian J. Bradford DeLong wrote this past weekend on his Web site. "The tax cuts made America a more unequal place, and the deficits slowed economic growth in the 1980s significantly." <snip>

Traditional economists argue that as the government enters private capital markets to finance its deficits, it competes with private borrowers. A deficit equal to 1 percent of the size of the economy -- about $110 billion today -- would slap as much as a full percentage point on the interest rates consumers pay to finance a new home or new car. By that measure, today's deficit would account for nearly 4 percentage points of a 6 percent mortgage.

But the new argument holds that interest rates are set on a vastly larger global marketplace. With rising global prosperity, even a federal deficit as large as the United States' would present little competition for would-be investors. A soon-to-be-published paper by American Enterprise Institute economist Eric M. Engen and Columbia University economist R. Glenn Hubbard, the first chairman of Bush's Council of Economic Advisers, concluded that the record budget deficit of 2004 should raise interest rates by 0.12 percent (rather than 0.6%).<snip>

That is a bipartisan fear (of dependency on Foreign Banks for US capital formation loans). "The key point is, even if it were sustainable, it's not desirable," said Orszag, a prominent Democratic economist. "We still will owe the money to foreigners. We're still mortgaging our future national income. Just because you can take out a larger mortgage to buy a bigger house doesn't mean you should."