Budget Deficits Do Matter

According to VP Cheney, no? According to respected Economist James Hamilton, yes. Cheney is a politician, whose only notable stint in the private sector was with Halliburton -- let's just say he was hired for his rolodex and connections with foreign leaders. The deficits are out of control, what else can he say?

Given that the US government has been, and is running for the foreseeable future, large deficits against a backdrop of low household savings without nary a budge in long term interest rates, one might think that Vice President Cheney's conclusion is correct (although it must be said that he denies having made this remark). A variety of studies suggest that debt and deficits matter, but these effects have been masked by the tendency of foreign monetary authorities and individuals to save U.S. Treasuries. (Note that there is some evidence that long term rates are now finally rising despite this effect of capital inflows.)

Long-term interest rates are rising, but Americans still expect home prices to keep rising. Go figure.