The Republican chairman of the House Budget Committee, Paul Ryan (who was also Mitt Romney's running mate), has an op-ed in the Wall Street Journal about his proposed budget. It all makes a lot of sense and is better than President Obama's budget, which Mr. Obama hasn't even bothered to put out. But I did have a quibble with one passage, in which Mr. Ryan writes, "a balanced budget will help the economy. Smaller deficits will keep interest rates low, which will help small businesses to expand and hire."
There are at least three reasons I don't find this argument, as framed, particularly convincing.
First, we've just come off a period of enormous deficits during which interest rates have been at historic lows, and in which there hasn't been such of a boom in small business expansion or hiring. That experience is enough to call into question Mr. Ryan's claim.
Second, during periods of large deficits, it seems likely that the Federal Reserve and the Treasury Department will do whatever they can to keep the interest rates low and thus to prevent the government's borrowing costs from skyrocketing and making the deficit even worse.
Third, the problem with a big deficit isn't so much the threat of higher interest rates — interest rates tend to climb in a growing economy anyway as the Fed tries to fight inflation, and Mr. Ryan and the Republicans shouldn't scare people about the effects of that — as the threat of higher taxes to close the deficit or pay off the debt. The higher taxes are bad for the economy.
I can understand the reasoning behind Mr. Ryan's formulation. It's the idea that the deficit or debt will get so large that bond buyers will grow skeptical of America's ability to pay it off, and thus require higher interest payments as compensation for the risk of default. In that scenario, the interest rate will not be set by the Federal Reserve so much as by the bond market. If Mr. Ryan wants to raise that scenario, he should go ahead and do it. But the shorthand of smaller deficits equal lower interest rates equal more growth and more jobs is not a shorthand that translates well given the recent reality of huge deficits, low interest rates, and anemic growth.