I know that the nation’s budget is not like a household budget, although many people act/talk like it is. Just like a ginormous corporate budget (Apple, Amazon, AT&T–and that’s just the As) isn’t either.
I also know that we can’t just print money endlessly and forever. Surely there is a position somewhere between these two poles that doesn’t require gutting programs* in a quest for the unicorn of The Balanced Budget?
So what is the Straight Dope on the federal deficit? Is it so bad to have one?
[If Paul Krugman is reading, feel free to post.]
*I know the President’s budget isn’t aimed 100% at cutting social safety net programs just to balance the budget. It’s to pay for the huge tax cuts that the very wealthy need or else they won’t be motivated to “create jobs.” <insert laugh track here> But all of this is supposedly in service of balancing the budget.
Well, “printing money” isn’t the problem, first. The budget deficit is money that the feds are borrowing, by selling bonds. And that essentially pushes a tax burden onto the future, because where else is the government of the future going to find the money to pay off those bonds but by taxes?
There’s a thought experiment about a government with only one taxpayer–when the government needs to raise one dollar to build a road with, it goes to the taxpayer and suggests that it can either tax him out of the one dollar or sell him a bond for one dollar. The upshot is that in this case, it makes very little difference–if taxpayer chooses the bond option, (the deficit,) he can never truly collect on the final value of the bond. If he tries, the government will either sell him another bond, or tax him to pay for the bond.
Of course in a country with so many taxpayers, buying government bonds isn’t so futile, but I think it’s helpful to think of the national debt as this nebulous future tax burden that must either be paid off or pushed endlessly into the future.
No, the budget doesn’t have to be balanced, but bond issues would ideally be for things that will increase the overall value of the society, i.e. to pay for roads or bridges or other infrastructure that will help future economic growth, as opposed to stadiums for the benefit of professional sports teams who might arbitrarily move elsewhere for a better deal in future.
There are two reasons to balance the budget, one is that the deficit is borrowing money to pay for present consumption. This means that in the future taxes must be raised to pay for the present consumption. Since taxes reduce the amount of consumption we are borrowing money from the future, which is unfair to the future.
The second is that if you believe it is within the government’s power to raise spending during recessions and reduce the suffering during recessions having deficits during the top of the business cycle reduce the ability of the government to borrow and spend during a recession when it is really needed.
I think the biggest practical concern is that it could hasten the collapse of the government. As long as everybody is certain that the government can collect the necessary taxes or sell more bonds to pay off the bonds that it’s selling right now, then pushing the burden into the future works great.
Once there’s some uncertainty about that–well, first the government will have to raise interest rates, which will make the debt increase even if it’s not spending any more. And that probably won’t permanently raise confidence in the security of the bonds.
If you get to the point where the government can’t get buyers for its bonds at any price, then we’ve hit a brick wall. It’ll have to either tax a whole lot right away, or default on the debt, which would cause a lot of problems for the bondholders and remove all the nation’s credibility to borrow in the future.
The analysis of the actual economics for the sustainability of a national debt burden is based typically on the factors of (1) the ratio of the debt to the GDP and (2) the extent of the spending that is considered for investment and creating growth capacity versus the current consumption (such as in the areas of the research, the infrastructure spending for the new or the maintence, the education is normally considered investment, sometimes the basic health care).
If the growth rate in the debt is greater than the growth in the GDP there is a potential important problem, and this most certainly if there is not a substantial investment but mostly the consumption (it is typically the subsidies, the social spenidng outside of the basic health care). If it is less, then it is likely not a great problem.
Only if you reach a point at which you can’t sell enough new bonds to cover your debt or the interest you have to offer on them is so high that it overwhelms your budget. The trend line of that latter problem is troubling, to say the least.
Ditka is right, it’s fine as long as you can sell your bonds. I wish people would stop associating deficits with presidents. All the president can do is push for programs and revenue policies. Congress sets the spending, Congress sets the tax rates. Blaming deficits on the president is silly. That being said, Bush’s tax cuts (that Congress passed) are the main cause of the deficit, along with the wars that Congress authorized and the Medicare Part D that was unfunded. Sure, Bush deserves some blame, but Congress passed these budget-busters.
Your graphic does not tell you anything that is useful.
There is no shortage of the demand for the American issuances and showing the ‘scary’ big numbers is merely naivete.
The graphic that is of interest to the bond buyers of the institutional buyers it the ratio to the GDP.
It is only an american right paranoid fantasy that the American government has any near term risk in not being able to place its debt issuances. It has not any basis in the actual financial economics analysis.
Maybe some time in the future it can happen, if there is some particularly bad policy, but the greatest risk the Americans face is the political perception of their potential lack of Willingness. It is not any rational economic analysis that sees a danger for the ability.
The government budget is exactly like a home budget in some sense:
There are times when it makes sense to borrow money and times when it doesn’t.
There are things that are worth borrowing for and things that are not worth borrowing for.
Otherwise, I’m not seeing why there has to be one answer for all occasions. The government can do one thing that a family can’t do, and that’s mandate for it to receive more income. So it’s got that going for it!
Yes, it matters. If you accumulate sufficient debt that you can’t afford to make the interest payments, you hit a debt crisis in the country. More specifically, when you accumulate sufficient debt that the interest payments are a sufficiently large percentage of revenue, you don’t have enough money remaining to provide goods and services, and the economy and society degrades. Also when you hit this point, people stop lending to you at reasonable interest rates, and you then lose the ability to push out the debt burden.
A major difference between countries and households is that countries can create and destroy money. As such, it’s possible for countries to monetize their debt. However, monetizing debt on large scales leads to inflation and economic stagnation, so that is not really a viable means of tackling ever-growing debt burdens.
In any particular year, the budget need not balance. However, over the long term, a reasonable balance between revenues and outlays needs to be struck.
Net Interest, FY2016: $240 Billion
Federal Debt Held by Public, Q4 2016: $14.439 Trillion
Federal Receipts FY2016: $3.268 Trillion
US GDP, Q4 2016: $18.869 Trillion (annualized)
So last year:
Aggregate interest rate was approximately 1.66% of debt held by the public
Net interest was 7.34% of total Federal tax revenue
Net interest was approximately 1.27% of GDP
So some deficit spending may be sensible if you can find private investments (tax breaks) or public investments (government spending) that can provide additional value at a decent rate of return.
The flip side is that interest rates are at very low levels currently and if interest rates move higher, interest payments will rise for a given level of debt.
OP: the higher the debt as a percent of GDP the higher the interest rate you have to pay. This has been demonstrated clearly throughout the world, for example in Europe in the last decade.
Let’s look at the U.S. in the next few decades. Does anyone dispute the following facts:
There was a large baby boom (the Boomers) followed by the following situation of people have far fewer kids (a baby bust). People are living much longer. So if you don’t adjust retirement ages you have a huge and massively increasing amount you are spending on an aged population for Social Security, Medicare while not having a growing population to support this burden.
It’s much better to deal with this situation now; to do some planning for this.
Good answers. I see that one of the most important things is maintaining confidence in the country’s bonds (rooted in confidence in the country itself) so that the country can be assured of $$ from that source in the future.
How far would the USA have to fall in the world’s estimation of financial worth/viability to come close to where, say, Greece has fallen?
Yes, much “better,” certainly, and “ideally” this wouldn’t be a problem at all. But practically and realistically, is it necessary? And is balancing the budget part of the dealing with the situation now and planning of which you speak? If so, how so?
Let’s say we balance the budget this year? How do we keep on doing it year after year?
Short answer: Deficits are not necessarily bad per se, but the problem is that we have no idea how to curb enough spending to rein in deficits for the foreseeable future. Deficits aren’t bad if they’re manageable (e.g., disaster spending) or supporting a long-term investment (analogous to a business taking out a loan). Our deficit is neither.
Well, Portugal, Italy, Greece, and those sorts are running debts in the neighborhood of 150% of GDP. But again, it’s not just the size of the debt itself but also the interest rate on the debt. Greece is sitting at something like 6% interest on 10 year bonds, Portugal and Italy are doing much better with lower rates. As a stark contrast, Japan is running at a whopping 250% debt-to-GDP. But they can afford to do so in a stable way (at least in the short term); due to the unusual nature of Japanese bond demand, Japan’s bond interest rate is basically 0%.
The U.S., being one of the largest economies, enjoys an additional advantage of having the U.S Dollar as a world reserve currency. People want US dollars to facilitate trade, and they want to own assets and buy debt denominated in US dollars. This demand can help push down U.S. interest rates, and allow the U.S. to support a higher debt load than it would otherwise be able to support.
All the same, there is no such thing as a free lunch (unless you’re modern-day Japan, apparently…). So some longer-term thinking surrounding a balancing of revenues and outlays is always warranted. Ultimately, running up deficits at rates far in excess of GDP growth rates is not stable or sustainable.
To take a crack at answering, while taking the grain of salt that I am not a government finances expert by any stretch, but I’d say that while the US government budget doesn’t need to be balanced in the way that a household budget needs to be, it does need to be balanced in the way that a government budget needs.
Things are different for the government because it’s such a large actor in the market that its action affect the results of the other actors. There’s a sort of fluid dynamics aspect that starts to become strong enough to come into play. Instead of just adding and removing numbers, you’re trying to estimate impacts on other parts of the economy and how those are most likely to interplay with what you’re doing.
The other large aspect is, effectively, the same as businesses have. They’re assumed to have experts looking over the books, so there’s greater leeway in allowing them to borrow and fudge the numbers around. At the end of the day, it’s trusted that they’ll be able to move parts around to pay things off if they need to. The US government, in particular, has a far more significant latitude in this.
But that all being true, you can’t just impose a 100% tax. That’s clearly stupid. You can’t just print 10X the money and call it 10X GDP growth. Again, that’s just stupid.
Whats “right” for a balanced US government budget is a lot less clearly defined than for a household budget. It involves mathematical modeling and simulation, guesswork, psychology, and political realities. But that doesn’t mean that anything whatsoever goes. However wide the boundaries might be for “balanced”, there are still boundaries and things need to stay inside them.
I thought per the Constitution that the President also had to sign off on such things. As a co-equal branch, doesn’t the executive also share the responsibility?
