The Trouble with Deficit Finance

Roger Garrison, Professor of Economics at Auburn, takes a look at the run-away deficit:

Mitchell E. Daniels Jr., the White House budget director, is reported as claiming that the current deficit, "representing 2.7 percent of the nation's gross domestic product, was not large enough in percentage terms to cause trouble or to raise interest rates...."

Didn't Everett Dirksen used to say that the main purpose of GDP (GNP in his day) was to make everything else look small by comparison?

Even at that, Mr. Daniels made the deficit look a little smaller than it actually is. His 2.7 percent suggests a GDP of about $11,300 billion. The readily available Federal Reserve Economic Data (FRED) provided by the St. Louis Fed shows that current GDP is closer to $10,300 billion, making the $304 billion deficit equal to 2.95 percent.

More to the point, GDP makes for a politically attractive but economically irrelevant denominator. How much is government borrowing relative to the funds available for borrowing? The relevant denominator is total saving and not total output. FRED shows the current annual rate of gross saving to be $1,574 billion. And the government is borrowing just under 20 percent of it. Does Mr. Daniels believe that this percentage is not large enough to cause trouble or to raise interest rates? And if so, just what percentage would be large enough?