The Glorious Evils of the Twin Deficits

Psycholinguistics has nothing to do with Alfred Hitchcock's 1960 cinematic classic, but rather with the way words and sounds trigger impulses in the brain. Apparently we all are prisoners of these subconscious and subliminal reactions.

This can lead to some unfortunate associations with common economic descriptors, such as surplus vs. deficit, or strengthen vs. weaken. The connotations of these word sets are such that we instinctively are attracted to strength and surplus and seek to avoid the opposite states of weakness and deficit. The words themselves attract politicians desirous of either solving the perceived associated problems or at least being seen as trying to do so, and that in itself can preclude reasoned study and serious debate.

Take the case of the "twin deficits," a phrase that arose during the 1980s to describe the simultaneous deficiencies in the federal budget and in the merchandise trade balances. Thoughtful observers such as Pete Peterson, now of the Blackstone Group, sounded warnings based on accounting identities prior to the 1987 stock market crash that someday we would have to pay the price of our profligacy. Ross Perot carried the torch for this cause in his 1992 campaign, and the eminent Robert Rubin championed the cause of budgetary discipline during the Clinton administration.

And the Problem Is?

We now sit at 45-year lows in nominal interest rates, with a recovering stock market and an economy that at least recently has shown some spark. Let us examine whether our psycholinguistic impulses, our fears of "deficit," "debt" and a "weak" dollar, have been justified by the economic data or whether they best are consigned to the dark closets of our childhood nightmares.

In each of the cases below, please remember there are no controlled experiments in economics, and so we have no idea what the outcome would have been under a different combination of deficits. In addition, the trade deficit used is the current account deficit reported quarterly by the Commerce Department; this measure includes the flow of services as well as the more familiar merchandise trade deficit that is goods-only. The government deficit is exclusive of state and local balances. Both deficits are displayed as percentages of current-dollar GDP.

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