As far as I know, the country’s budget is different than that of a households. It seems like we could operate with a deficit perpetually and be fine. Thus, why do we need to balance it?
Look at Greece or Ireland or Spain.
Why do you think that?
The problem arises when government debt grows faster than the economy for long periods of time. That’s unsustainable… though when or whether financial markets will care is another matter. Note that you can have positive deficits and still have debt fall as a share of GDP. That occurred for most of the 1945-1980 era.
Qin’s reference to Spain and Greece is highly misleading, as those countries don’t own their own currencies. To put it another way US States face much more severe limits from the bond market than the Federal government does, because they don’t have their own currencies.
That said, running a deficit during times of normal economic expansion taps into national savings which leads to some combination of repressed investment or repressed exports via a stronger currency. So chronic deficits are not a good thing.
See it rise during Reagan, fall during Clinton, rise during GWBush.
How big of a deficit?
I am really ignorant with this stuff. Where does the budget money come from and where does it go? When we run a deficit, this means we are spending more than we are taking in, right?
I assume that this is only sustainable when growth is offsetting things and we aren’t defaulting anywhere, right?
And can you elaborate more about your final paragraph there about investment and exports? Does this have anything to do with the standard GDP equation Y = C + I + G + NX?
We finance the national debt by selling government bills, notes, and bonds. (Collectively these are called “securities”.) Currently the debt is about $16 trillion. That means that in total, investors are holding $16 trillion of US government securities. This includes all kinds of investors: individuals, pension funds, foreign countries, and so forth. They are willing to hold our debt because they get paid interest. Currently the interest rates we are paying are extremely low. Investors are still willing to hold our debt because there are few other options. Neither corporations nor foreign countries are offering high interest rates and safety.
That may change in the future, though. Also, as our national debt gets larger, investors will become more worried about the possibility of default or inflation, and they will demand higher interest rates, which in turn will cause the deficit to rise even faster. Then throw in the fact that Social Security and Medicare are on the path to bankruptcy, that countless public and private pension systems are running out of money, and that many state and local governments are running out of money and will want bailouts from the government, and we’re in a lot of trouble. It’s true that we could go on indefinitely without ever balancing the budget, but we can’t run the sorts of deficits that we have now indefinitely, much less deal with all these future problems.
The current troubles in Europe were caused by enormous deficit spending, mixed with corruption and bad economic policy. Measure for Measure is correct in saying that the situation is somewhat different than ours, because Greece & Co. don’t have their own currencies. However, similar situations have unfolded in countries that did run up huge deficits without restraint or forethought. Argentina is one example. Germany during the 1920’s is another.
Actually, the debt held by investors is only 11 trillion. The rest is intra-governmental.
I am just trying to understand the sort of bell curve, here. Maybe if I ask it this way:
What is the pro/con of not selling securities/increasing the debt at all?
What is the pro/con of not keeping a moderate deficit?
What is the pro/con of completely balancing the budget so we owe 0?
What is the pro/con of a chronic, large deficit?
Also what would lead to default or inflation? Is this a result of the deficit or other factors? As far as I know, inflation just makes currency worth less than it did before, which is technically making the debt pricier, right?
There are a couple of different things here. When they talk about the “budget”, they are basically talking about how the US Government spends money. The government receives revenue in the form of taxes and incurs expenses in the form of the services it provides - roads, military, Medicare, salaries for government employees, etc. When we say we are running a deficit or a surplus, we mean that the government is spending more or less than it is taking in.
When the government needs more money, they can, as ITR champion pointed out, incur debt by selling treasury securities.
This is different from economic growth of the country as a whole. It’s related in that the G in the GDP = C+I+G+(X-M) equation refers to government spending. The trade deficit (X-M) is also a different matter as it relates to how much we export to other countries vs what we take in.
AFAIK, we have never “defaulted”, nor are we likely to. The reason for that is we can simply print more money to pay people off with. The downside of this approach is that it devalues the dollar and leads to inflation. In extreme cases, hyperinflation and the collapse of the currency. However, because the USD is tied to the worlds largest economy and is the de facto reserve currency for the world (about %60 of all currency traded), that affords us the ability to incur a bit higher debt than say, Greece.
Another point: It’s probably a good thing for the health of the economy, for there to exist an investment medium that’s extremely reliable (even if it isn’t the most directly profitable). Right now, there’s not anything that fills that niche better than US Treasury bonds. If the government paid off all debt, and never incurred any more, what would fill that niche?
I am not an economist, but perhaps what we need is a return to this approach - which was to fight inflation, but it would also keep us from being indebted to China.
It worked for our parents and grand-parents - why not for us? Compared to WWII, only the military seems to have any skin in the game for all our recent wars.
We do not need to have a balanced budget next year. In fact, that would be disastrous. We do need to have a balanced budget in the long run. Not to do that would be disastrous.
This page has a valuable series of charts showing current deficits in several ways and showing how they fit in historically. (All data appears to be taken from government reports although that is a private site.)
In percent of GDP, not only is the current deficit not out of line, it is almost exactly where it was during the Reagan years. And it is projected to go down every year for the foreseeable future, although all such projections are subject to enormous error bars.
The deficit for FY 2013 is expected to be $901 billion, with revenues of $2.902 trillion and expenditures of $3.803 trillion. Anyone of any economic persuasion understands that cutting $901 billion out of the government will plummet the country into recession. The so-called fiscal cliff from mandated budget reductions that will start on Jan. 1, 2013 is the product of much tinier reductions. You cannot say in the real world that all the money the government doesn’t collect will be spent by ordinary people. A $901 billion cut would affect real world programs that affect real world people and is mostly not replaceable by private spending.
So why not just continue with deficits forever? The issue there is that we fund the deficit by loaning money and repaying it with interest. In FY 2013 those interest payments will total well over $200 billion. That’s a lot of money that could be used for the good things that government does (and there are many such things) or just not collected. An increasing deficit means that these interest payments increase every year. Right now they’re only about 3% of spending. You want to reduce that over time if possible.
A healthy, growing economy does this automatically. The lower future projections for the deficit appear to account for the economy’s growth, accurate IMO since we have passed the low point and are slowly trending upward. Cutting the deficit in half over the next several years is probably a good goal. Getting the deficit to close to 0, as it was under Clinton, might be an accompaniment to that. Most economists say that a slight deficit is good because it allows for emergency spending and creates a very slight inflationary trend, which most want since deflation is an agreed-upon bad thing. (People who talk about the debt or deficit creating hyperinflation under any current forecast can be tuned out completely.)
How exactly to best accomplish this is a political argument and mostly irrelevant to bottom line numbers.
Government debt is a promise by the government to pay a fixed number of dollars in interest at a given time. When there is inflation, the number of dollars that the government has to pay on each security remains the same, so the total value of what the government pays in interest goes down. This is why governments that run deficits often end up inflating their currency, and the larger the defiict, the greater the inflation. It’s been the same story in countless cases going back centuries.
Hell, it’s not even that different. How many people own their house?
I’m guessing most people spend most of their lives in net debt.
Has anyone read anything about that site or its author? I wonder about the accuracy and objectivity of the presentation of all that data. (Lies, Damned lies or Statistics?)
Well there are different types of deficits. The budget deficit is the excess of spending over taxes. If taxes are higher than spending, then we have the reverse, a budget surplus.
Sometimes people talk about the trade deficit though. That’s the excess of imports over exports. If exports are higher than imports, we have a trade surplus.
When we run a budget deficit, the money has to come from somewhere. It is borrowed: the mechanism is that the Treasury issues bonds. Those who buy the bonds - banks, insurance companies, mutual funds, even individuals- are loaning the government money. One side issue is that a big buyer of Treasury bonds is the Federal Reserve - which attempts to stabilize the economy via manipulation of interest rates - and sometimes the social security trust fund (not now though).
A default occurs when the US government can’t make its interest payments on time. Or if they can’t pay back the principle - the amount that they borrowed to begin with. That has never happened. There was the embarrassment of a year ago though, which I won’t get into here. Latin American countries defaulted on their bonds during the 1930s. Believe it or not, and allegedly sophisticated big investors can be fairly naive about the possibility of governmental default: a dataset of these experiences was only assembled recently.
Yeah, it does. It’s an intermediate macroeconomics topic, which most don’t grasp. Damn, I’ll give it a shot:
The investment one is easy. During good times, Federal borrowing has to compete with private borrowing for the pool of savings. If the pool is fixed, higher deficits lead directly to lower spending on plant and equipment.
But the pool is not fixed. It rises with economic growth. And a country can borrow from abroad. There’s an accounting identity which shows that S - I = X-M. That is, the gap between savings and investment must be equal to net exports. Ignore stocks for a moment, and just think about bonds. If we have excess savings we will be buying more foreign bonds than we are selling. But if we buy bonds on net, we have to be selling foreigners something - that would be goods. In other words we’re running a trade surplus: exports are higher than imports.
For deficits, do the reverse. If investment is more than savings (the pool of savings is too small) we have to sell the foreigners excess bonds - which means we need to buy excess goods. Imports exceed exports: that’s a trade deficit. Re-read all this and you will see that high budget deficits have a link to trade deficits: sometimes they are called the twin deficits.
During WWII there’s a benefit of running a huge deficit. It’s an emergency: we’re going head to head with Hitler and Hirohito. In 1933 we had unemployment approaching 20% or more. It’s an emergency. Don’t put a lock on your fire extinguisher: use the fire extinguisher. Run up big deficits: lower taxes will stimulate consumer spending. Higher spending will add to aggregate demand. In fact if you hire someone to build a road, they will spend a share of that money, as will the person who receives it. In textbook terms, there’s a multiplier to government spending during recession.
Same thing now: we should run a temporary deficit to jump start the economy. The Federal Government should borrow money, hand it to the states so that they don’t have to fire teachers, firefighters and cops. That will prop up total demand for goods and services. Instead, we actually have falling US spending on things like infrastructure, when state and local outlays are considered. That’s nuts during the worst downturn since WWII.
During expansion though, we want the opposite: higher taxes and cuts to governmental spending.
While people were certainly feeling more patriotic back then, the success of war bonds had a lot more to do with the economic situation at the time. Because of rationing, people didn’t really have anything to spend their money on, but because of wartime industries were getting paid better than they had in decades. People obviously had a lot of distrust for the stock market at that point (and, indeed, it performed fairly poorly until the end of the war), so they just needed somewhere safe to put their money.
Back then, war bonds could compete by offering an interest rate that was favorable compared to burying your money in the back yard. These days, there’s any number of fairly safe higher yield investments, so the government would need to put a much higher interest rate on its bonds if it wanted to appeal to individual investors.
We do not ever need a balanced budget. We have to avoid the current state of a constantly growing deficit. But as long as we maintain a debt we would desire a surplus budget which is also not balanced.
We do actually need a balanced budget during good years to make stimulus possible in bad years. You can’t run small deficits in good times and huge ones in bad times. That just continues to increase your debt load over the long term.
But if you run surpluses in good times, then you can run up a couple of big deficits to get yourself out of recession when bad times come.