Fearmonger Fallacy

"Deficits don't matter." -- Dick Cheney

Third-quarter GDP grew by 4.1 percent, to $16.9 trillion annually. -- Commerce Department

   In formal logic, the rhetorical strategy known as the Appeal to Fear is dismissed as a fallacy. Certainly, there are occasions when fear is a legitimate emotion, and when ignited it can save lives. But when debaters use an appeal to fear -- justifiable or not -- as a strategy, a device calculated to win, just for the sake of winning, then this appeal is a fallacy.
   Consider the recent brouhaha over the national debt and deficit spending. To hear the fearmongers tell it, America is headed for hades in a handbasket, and unless spending is cut sharply and immediately, disaster looms.
   Reality check: Take it from the arch leader of the GOP conservatives, Dick Cheney. (Yes, he is a leader, and yes, he is often arch.) "Deficits don't matter," Cheney noted.
In fact, when it comes to rebooting a lagging economy, deficit spending is essential, an investment in the future. Just as a family or a firm can periodically spend beyond its income, either for school tuition or for purchase of equipment, so also can a government spend on infrastructure projects, putting people to work so their salaries can provide the juice needed for economic health. Think of it as a circle of spending. When people have income, they spend on food, clothing and shelter, and pay taxes on their income and purchases, which in turn generates revenue for government and firms. And the cycle continues.

   Does there come a point when deficit spending by government is too much, and the national debt is too high? Perhaps. But how much is too much, and how high is too high? Currently, the U.S. national debt as a percentage of its total production of goods and services -- Gross Domestic Product, or GDP -- is about 70 percent. Other nations have far higher ratios, some well over 100 percent, and still show little sign of collapsing. Moreover, most American government debt is in the form of government issued bonds, held by Americans themselves. And to cash in those bonds, holders can either redeem them -- sell them back to the government -- or sell them on the open market. So unless there is a run on a government, where everyone tries to redeem their bonds at the same time, there is little danger. Unless, of course, an overwhelming majority of bondholders lose their faith in the creditworthiness of the U.S. government and cannot cash in their bonds, either through the government or through the open market.
   Possible? Yes, but not likely. Why? Because most of the bonds are owned by Americans themselves, and the bonds are negotiable -- available to be sold to others who still have faith in the creditworthiness of the U.S. government.
   Moreover, many of the bonds -- issued by the U.S. Treasury -- are held by the Federal Reserve Board, another government agency. In recent months, the Fed has been active in the open market, buying up publicly held bonds and pumping more cash into the economic revenue stream to rejuvenate the economy.. Granted, this can cause inflation -- more money means higher prices -- but the Fed monitors both to achieve a balance and promote economic health.   So, since the Fed has such a vast quantity of bonds and cash, failure to maintain such a balance would effectively destroy the nation's health.
   Reality check: Not likely.

   In any case, once the nation's economy resumes its growth pattern, government, through fiscal spending, and the Fed, through monetary policy, can and should step back.
   So the critical issue now is, has the economy recovered enough so Washington can scale back its interventional policies?
   Perhaps, and that's the tricky part. Cut back too much, too soon and too fast can put the national economy into another tailspin. Think 1937, when such a pullback extended the Great Depression. And doing so today would extend the Great Recession.
   The U.S. economy bottomed out five years ago, and resumed its upward path. The most recent estimate by the Bureau of Economic Analysis in the Commerce Department, issued last week, said output rose again the third quarter of 2013, by 4.1 percent, to an annualized total of $16.9 trillion.

   Deficit spending works. It worked in the mid-1930s, to pull out of the Great Depression, and it worked again to pull out of the Great Recession.
   Caution: Scaling back too far, too fast and too soon can cause a relapse. The fear mongers who warn so much of the evils of government intervention should heed the lessons of history, both recent and otherwise.