Does it matter whether the federal government runs a deficit?

No

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by Sean Dehoney

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"Spending financed not by current tax receipts, but by
borrowing or drawing upon past tax reserves." , Is it a good idea? Why
does the U.S. run a deficit? Since 1980 the deficit has grown
enormously. Some say its a bad thing, and predict impending doom,
others say it is a safe and stable necessity to maintain a healthy
economy. When the U.S. government came into existence and for about a
150 years thereafter the government managed to keep a balanced budget.
The only times a budget deficit existed during these first 150 years
were in times of war or other catastrophic events. The Government, for
instance, generated deficits during the War of 1812, the recession of
1837, the Civil War, the depression of the 1890s, and World War I.
However, as soon as the war ended the deficit would be eliminated and
the economy which was much larger than the amounted debt would quickly
absorb it. The last time the budget ran a surplus was in 1969 during
Nixon's presidency. Budget deficits have grown larger and more
frequent in the last half-century. In the 1980s they soared to record
levels. The Government cut income tax rates, greatly increased defense
spending, and didn't cut domestic spending enough to make up the
difference. Also, the deep recession of the early 1980s reduced
revenues, raising the deficit and forcing the Government to spend much
more on paying interest for the national debt at a time when interest
rates were high. As a result, the national debt grew in size after
1980. It grew from $709 billion to $3.6 trillion in 1990, only one
decade later.

Increase of National Debt Since 1980 Month Amount
-
12/31/1980 $930,210,000,000.00 *
12/31/1981 $1,028,729,000,000.0 0 *
12/31/1982 $1,197,073,000,000.0 0 *
12/31/1983 $1,410,702,000,000.0 0 *
12/31/1984 $1,662,966,000,000.0 0 *
12/31/1985 $1,945,941,616,459.8 8
12/31/1986 $2,214,834,532,586.4 3
12/31/1987 $2,431,715,264,976.8 6
12/30/1988 $2,684,391,916,571.4 1
12/29/1989 $2,952,994,244,624.7 1
12/31/1990 $3,364,820,230,276.8 6
12/31/1991 $3,801,698,272,862.0 2
12/31/1992 $4,177,009,244,468.7 7
12/31/1993 $4,535,687,054,406.1 4
12/30/1994 $4,800,149,946,143.7 5
10/31/1995 $4,985,262,110,021.0 6
11/30/1995 $4,989,329,926,644.3 1
12/29/1995 $4,988,664,979,014.5 4
01/31/1996 $4,987,436,358,165.2 0
02/29/1996 $5,017,040,703,255.0 2
03/29/1996 $5,117,786,366,014.5 6
04/30/1996 $5,102,048,827,234.2 2
05/31/1996 $5,128,508,504,892.8 0
06/28/1996 $5,161,075,688,140.9 3
07/31/1996 $5,188,888,625,925.8 7
08/30/1996 $5,208,303,439,417.9 3
09/30/1996 $5,224,810,939,135.7 3
10/01/1996 $5,234,730,786,626.5 0
10/02/1996 $5,235,509,457,452.5 6
10/03/1996 $5,222,192,137,251.6 2
10/04/1996 $5,222,049,625,819.5 3
* Rounded to Millions

Federal spending has grown over the years, especially starting in the
1930s in actual dollars and in proportion to the economy (Gross
Domestic Product, or GDP).
Beginning with the "New Deal" in the 1930s, the Federal
Government came to play a much larger role in American life. President
Franklin D. Roosevelt sought to use the full powers of his office to
end the Great Depression. He and Congress greatly expanded Federal
programs. Federal spending, which totaled less than $4 billion in
1931, went up to nearly $7 billion in 1934 and to over $8 billion in
1936. Then, U.S. entry into World War II sent annual Federal spending
soaring to over $91 billion by 1944. Thus began the ever increasing
debt of the United States. What if the debt is not increasing as fast
as we think it is? The dollar amount of the debt may increase but
often times so does the amount of money or GDP to pay for the debt.
This brings up the idea that the deficit could be run without cost.
How could a deficit increase productivity without any cost? The idea
of having a balanced budget is challenged by the ideas of Keynesian
Economics. Keynesian economics is an economic model that predicts in
times of low demand and high unemployment a deficit will not cost
anything. Instead a deficit would allow more people to work,
increasing productivity. A deficit does this because it is invested
into the economy by government. For example if the government spends
deficit money on new highways, trucking will benefit and more jobs
will be produced. When an economic system is in recession all of its
resources are not being used. For example if the government did not
build highways we could not ship goods and there would be less demand
for them. The supply remains low even though we have the ability to
produce more because we cannot ship them. This non-productivity comes
at a cost to the whole economic system. If deficit spending eliminates
non-productivity then its direct monetary cost will be offset if not
surpassed by increased productivity. For example in the 1980's when
the huge deficits were adding up the actual additions to the public
capital or increased productivity were often as big, or bigger than
the deficit. This means as long as the government spends the money it
gains from a deficit on assets that increase its wealth and
productivity, the debt actually benefits the economy. But, what if the
government spends money on programs that do not increase its assets or
productivity. For instance consider small businesses. If the company
invests money to higher a new salesman then he will probably increase
sales and the company will regain what it spent hiring him. If the
company spends money on a paper clips when they have staplers they
will just lose the money spent on the paper clips. This frivolous
spending is what makes a deficit dangerous. Then the governments net
worth decreases putting it into serious debt.
Debt should not be a problem because we can just borrow more,
right? This statement would be correct if our ability to borrow was
unlimited, but it is not. At first the government borrowed internally
from private sectors. The government did this by selling bonds to the
private sectors essentially reallocating its own countries funds to
spend on its country. This works fine in a recession, but when the
country is at or near its full capability for production it cannot
increase supply through investment of deficit dollars. Deficit dollars
then translate into demand for goods that aren't being produced.
Referring back to the small business example, if a company is selling
all the products it can produce they can still higher another
salesman. But since there are no more goods to be sold the salesman
only increases the number of consumers demanding the product. Without
actually increasing sales. The problems of deficit spending out of a
recession even out through two negative possibilities, inflation and
crowding out. Inflation means there is more demand or money than there
are goods this causes an increase in prices and drives down the worth
of the dollar. This depreciation of the dollar counters the cost of
the deficit but destroys the purchasing power of the dollar. A five
dollar debt is still a five dollar debt even if the five dollars are
only worth what used to be a five cent piece of bubblegum. Despite its
dangers inflation is used to some extent to curb the debt. Crowding
out is when the government is looking for the same capital that the
business sector wants to invest. This causes fierce competition for
funds to invest. The fierce competition causes an increase in interest
rates and often business will decide against further investment and
growth. The government may have the money to build new highways but
the truckers cannot afford trucks to use on them. The governments
needs will "crowd out" business needs. This turns potential assets
into waste.
However, there is a third option which would allow the
government to run a deficit and avoid the negative aspects of
inflation and crowding out. Borrowing from foreign sources is a
tangible and recently very common practice. Attracted by high interest
rates and stability, foreigners now buy huge amounts of U.S. national
debt. Of course this cannot be the perfect solution otherwise no one
would be concerned about the debt. The problem with borrowing from
external sources is the lack of control the government has over
foreign currency and debts. Internal debts can be paid with increased
taxes, inflation, and other monetary controls the government has but
external debts can extremely damaging to a country if it cannot buy
enough of the foreign currency to pay the interest.
Running a deficit is apparently good for an economy that is
operating inside its production possibilities curve but it can be
damaging to an economy operating on the curve. A deficit managed
properly has the effect of increasing demands. An economy inside its
curve can increase supplies in reaction. An economy on the curve can
increase demand but its supplies cannot increase causing prices to
rise, or inflation. If there is no deficit and the curve shifts to
the right then supplies will not increase and the country will no
longer be operating on the curve. A deficit must be maintained to
insure that the economy grows with its resources.
Is the U.S.'s current debt bad or good? The trick is finding
out how large the deficit should be in order to allow for growth
without waste. The U.S.'s deficit is bad at this point because the
U.S. is close to its maximum production capabilities, and deficit
money is being wasted. For example two of the largest portions of the
budget: defense and social security. Defense spending produces little
or nothing except in times of war. Judging by the current status of
the United States as the only existing "Nuclear Super Power" war is
not a tangible event in the near or distant future. The way social
security is managed creates a huge waste. As managed, social security
is money spent to immobilize a large and fairly capable part of the
work force. It encourages elderly people not to work by spending
deficit money on them. Reducing productivity and increasing the debt
at the same time. In its current state the U.S. should attempt to
reduce its deficit but eliminating it is not necessary and could do
more damage than good.

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