How would my life be different if the U.S. had no budget deficit

Great Debates
1

I’m not sure if this is a General Question or a Great Debate…I figure that there is a factual answer, but I’m also pretty sure that this is fraught with political beliefs. So, I’m trying here.

Anyway, a little research reveals that the last time (indeed, the only time) the U.S. was debt free was under the Presidency of Andrew Jackson in 1835. The country responded to his abhorrence to debt with an economic depression, which led us back to government debt, a feature we’ve had ever since.

And it’s something we all universally condemn. I’ve never encountered anybody who is happy about deficit spending. People routinely shake their head at the trillions of dollars the government owes. Going to war without paying for it is viewed as reckless. So, too, with government largesse when there is no plan on how to pay for the social programs it offers. Every politician seems to talk about fiscal responsibility, so we all agree that it is a good thing.

But how important is it? Our economy has exponentially expanded since the 1830’s, and I’d much rather live in today’s U.S., what with its obscene government debt, than Jackson’s America.

Let’s assume we managed to start running huge budget surpluses and winnowed the debt down to nothing. What would that do to me - a middle class American with a wife and son? It’s not like it would drastically reduce interest rates - they can’t really go any lower. My best guess is that income taxes could then be reduced across the board; perhaps we’d all see our rates cut in half. Or perhaps we’d get more services for the same expenditures?

But I’m not sure, since the opposite doesn’t seem to be true. The U.S. spent more than $2 trillion in Iraq, but I am not aware of any counter-effects on the U.S. population. I didn’t need to start hauling my worthless dollars around in a wheelbarrow to buy bread. Usual government functions (like the post office) weren’t shut down because of lack of funding. There were no serious calls to double everyone’s taxes.

Dick Cheney famously grumbled that “deficits don’t matter”, but he was part of an administration that oversaw the worst economic collapse since the Great Depression. So, was he right? Why should I care if the U.S. spends another couple trillion? How does it impact me?

2

Well given that we are running deficits of about $500B per year, and the interest on the federal debt is about $220B per year, then (assuming that we are still committed to keeping the debt at zero) we would need to come up with another $280B dollars either in budget cuts or raised taxes. So, no you wouldn’t see a reduction in taxes or an increase in services. Quite the opposite in fact.

3

I totally agree that getting us to zero debt is prohibitive, and I don’t think it’s realistic. But, if poof it’s gone, then what? It sounds like the answer is a country that doesn’t invest in its infrastructure or social safety net. In other words, a return to the type of America that Jackson lived in, where you were totally on your own regarding retirement, healthcare, education, and other basic features of modern life. In other words, no debt would be a huge burden on the people of this country. Is that right?

4

Being debt free and not running a deficit are two different things. I think the main complaint is that the US ALWAYS seems to run a deficit, which is probably not a good thing, though isn’t as horrible as many people seem to think (it doesn’t work the same as a person or household running a deficit all the time and piling on the debt). What would be nice if if, in good years, the US balanced the budget while in bad years we could afford to have a larger deficit without worrying as much. The way I look at it is if you generally stick to a budget and spend within that budget then when bad shit happens (someone destroys several large buildings, you go to war, a natural disaster happens in one of your coastal cities, you have an economy meltdown…heck, let’s just say ‘when Bush the Younger is your President’) you can then spend in deficit as you need to in order to get out of the problem.

As to your question, it probably wouldn’t affect you one way or the other in the short term. In the long term if we are always in deficit spending and then really in deficit spending if we get another Bush…well, that’s going to impact you negatively for sure.

5

There are lots of unknowns. Is the economy so robust that it can generate enough in tax revenue to meet the needs you mention, like it was in the late '90s? Or is the balanced budget coming at the expense of necessary investment and social welfare measures? The only real advantage would be eliminating the interest cost - or at least most of it, since the government will still be issuing short term bonds at least and bonds for Social Security to buy.

Cheney was kind of right about deficits not mattering. The recession wasn’t caused by the deficit.

6

The country of Florida might still be at war with the Atlantan Federation.
But it is a lost cause. Don’t ty to be a hero Moriarty. You might be lucky and end up a POW.

7

Generally speaking, budget deficits are us spending future money today. So as a gross generalization, if we had no budget deficit, we would have more money to do things with in the future.

8

No. Let’s imagine debt was not allowed. Let’s imagine the Constitution said that there couldn’t be any annual deficit ever, and blocked off special bond issues and other means of evading the rule. The government had to have a balanced budget ever year. What would that mean?

Well, it would mean that each year the government receives a certain amount of money through (mainly) taxes, and can spend the that money on whatever it wants, but couldn’t spend any more. The government could spend all the money on education, or no money on education. It could spend a ton on health care, or nothing on health care. An anti-debt law would limit how much the government can spend, but the government could still spend the available money on whatever it wanted.

As a point worth noting, there are governments that operate without annual deficits allowed: all 50 state governments. They have to produce a balanced budget each year. Obviously they still spend money on education, infrastructure, and so forth.

9

Your state governments I understand get very large federal transfers. If this is the case, the comparison is not a sensible one.

Just as it is economically rationale for the private company to utilize the debt and not only its current cash flows to invest in its activities, it is rationale for the sovereign state to utilize the debt.

whether any specific spending is useful or not is a specific question.

I do not know in the modern economic history of any large and organized state that used no debt at all.

10

First. they do a lot of the tricks you would forbid.
Second, one big reason it took so long to recover from the recession was that state governments, under these rules, laid off or furloughed workers making a bad employment situation even worse. If they had kept spending like they did in the past it would have had a stimulative effect. What saved the day was the stimulus from the federal government. If we had followed the advice of the economic illiterates we would have fallen into a Depression, no doubt about it.

Yeah, they still spend money on education, but adequate money? People are unemployed - how would you fund that with reduced tax revenues from reduced economic activity?
Do you want to live through another Great Depression? Sure seems you do. From what my parents who lived through the last one said, it wasn’t a lot of fun.

11

This crowd is to economics what creationists are to biology. But without the excuse that God gave them the real story.

12

The problem with deficit spending is the interest.

Let’s say the government wants to build a bridge. The bridge costs $10,000,000. The government could collect $10,000,000 in taxes and pay for the bridge that way. But people hate paying taxes.

Or the government could issue some bonds to pay for the bridge. It sells $10,000,000 worth of bonds and uses that money to pay for the bridge. Everyone is happy.

Except the government now has to redeem those bonds. And the bonds pay interest, which is why people bought them. So the government sold $10,000,000 worth of bonds but has to pay $12,000,000 to redeem them. And the government has to collect $12,000,000 in taxes to redeem those bonds.

We can argue about whether the bridge was needed and the effects of taxation on the economy and other issues. But I think one point we can all agree on is that if it comes down to a choice between building a bridge for $10,000,000 or building the same bridge for $12,000,000, the former is better than the latter. If the government had just paid $10,000,000 for the bridge directly, it could have either collected $2,000,000 less in taxes or spend that $2,000,000 on a school lunch program (choose whichever one you feel is better).

One counter-argument is that money doesn’t just disappear. People bought those bonds and collected the money when they were redeemed. So some people benefited from the government’s decision to issue bonds because they collected a share of that interest.

The problem with this counter-argument is that bond interest is a really bad way to pay out government money. It tends to go to people that least need any government money. In fact, a large share of it tends to go to people that don’t even live in the United States. If you follow the money around, deficit spending is a program where the government collects money from American taxpayers and gives it to foreign bankers.

So to answer the OP’s question, if there was no budget deficit, we’d either have the same amount of government services for less money or more government services for the same amount of money.

13

By this criteria, since you are paying a lot more than the list price for your house thanks to your mortgage, no one would ever borrow money for everything.
A bridge is a bad example since it is a capital expenditure, which are often financed by bonds. The bridge is an investment. How much is the $10 million going to return to the economy - which is really more important than money directly returned to the government. If more than $12 million, the bridge is an excellent deal.
Now, the government can pay for the bridge in cash. But then you, for one year, sacrifice what that $10 million can do for the area. I’ve never done government budgeting but I have done budgeting for my department, and there is a very rigid distinction between capital expenditures - long term - and expenses, which are short term.

The real thing you should be complaining about is the government borrowing for current expenses. But even states with balanced budget requirements are allowed to borrow for capital projects.

14

What’s your justification for saying this? Did I actually say that I want to live through another Great Depression?

15

Why imagine? US deficits were insignificant, by the standards of the past century, from 1870 until US entry in World War I.

This corresponded to a period with frequent panics AKA depressions. Interest rates repeatedly hit 125 percent while prices were in decline. This was because there was no way to the government to inject money, into the economy, at times it clearly needed it.

I can see an argument made that there should be more of an effort to run longer surpluses when the economy is good. But not allowing debt, in bad times, was tried, and was shown to be, to coin a phrase, voodoo economics.

Also, you should consider the possibility that, with current low interest rates, government spending for, say, research on how to combat global warming, would, in the long run, pay for itself. I realize that a lot of government spending doesn’t pay for itself. This is an argument for being careful about deficit spending, but not one for ending it.

16

Borrowing for infrastructure can be good and productive. Borrowing to buy votes with stupid policy is counterproductive.

17

Let’s dispose of two misconceptions.

(1) The notion that a $10,000,000 bridge is more expensive when paid, with interest, in the future ignores notions like “opportunity cost” or “present value of money.”

People are happy to wait several years and pay $1200 tax rather than $1000 tax today, not (just) because of a tendency to procrastinate, but because the present dollar is more valuable. For example, they could invest the $1000 in stocks and pay the $1200 later – probably with funds left over since stocks often return more than the low interest the government would pay.

(Since this is the SDMB, let me forestall the obvious slippery-slope “If it’s good to delay payment for the bridge by 5 years, it’s even better to delay it by 5000 years … or forever!” I agree with Voyager that capital investments should be considered different from current expenses, with loan life related to the investment’s life. I just want to dispose of the silly notion that $12,000,000 in future dollars is intrinsically $2,000,000 more than $10,000,000 in current dollars.)

(2) The factoid about “last debt-free under Jackson” obscures the actual pattern of U.S. debt. Instead, examine this graph or this longer-term graph. You will see that the U.S. borrowed heavily (from its own citizens who were asked to postpone luxuries) to defeat the Empire of Japan and Hitler’s Third Reich and that most of that debt dissipated in the following three decades.

Rather than a long-term tendency to run deficits, the graphs show that deficits result from major wars, major recessions, and tax-cutting binges by a few recent Presidents.

18

Financially, it would make better sense to buy a house outright rather than take out a mortage. But realistically most home buyers wouldn’t be able to buy a house if they didn’t borrow money.

The government doesn’t face this problem. We could pay for the federal budget on an ongoing basis through taxation. We just choose not to.

I just used a bridge as an easy example. You could apply the same argument to any other government expenditure.

I’m sure you’re aware that a government budget is not the same as a business budget. A business has to figure out what its revenue will be. A government can basically set its revenue at whatever level it wants to (okay, it’s not unlimited - but if a government wants more money it can just collect more taxes). A business can also make investments so that its future revenue will be higher. A government has no ready equivalent way to invest money for the future (again there are some minor exceptions).

19

It wouldn’t work if that was the case. People buy government bonds because they expect to receive more in value for them - above and beyond the declining value of the money. If that future $1200 was worth less than today’s $1000 then nobody would buy the bonds. The government would have to raise the interest rate until the future payment was worth more than the current price taking into account opportunity cost and the present value of money.

20

Depends on your alternatives. If the bank and under your pillow is paying 0% interest than your gain is 0. A $200 gain beats 0 especially if you don’t have any tolerance or ability to deal with stock market volatility.