What is the plus side of not have a federal deficit? Do the interest rates drop? Does inflation fall? Do we become a rich uncle who is always willing to hand out money?
First a couple of terms:
Deficit is used to refer to the income/outgo of a single fiscal year. A deficit occurs when the government spends more money than it takes in. A surplus occurs when the government takes in more money than it spends.
We actually had surplusses rather than deficits recently (which is why G W Bush campaigned for tax reduction and pushed it through Congress as soon as he was elected).
Debt is the actual “bad guy” in the economic scenario. When the government has to borrow money in order to pay its debts because of a deficit, it competes against corporations and other people for the money to be borrowed and drives up the cost (interest) on the money that it borrows.
How much debt the country can carry without suffering serious economic tribulations is a subject that economists, politicians, and the participants of Great Debates can argue at length. (Placed in personal terms, it is often agreed (there are some dissenters) that a person is better off to have a debt and to own their own home than to be debt free. The issue becomes whether a person with a $30,000 income should carry a mortgage for a $60,000 house, a $120,000 house, or a $240,000 house. How much income is needed to pay the monthly service on the debt and how much is needed to continue eating after the mortgage is paid? This is subject to change depending on the interest rate and the costs of other items.)
The same thing happens with the government. How much is a strong military “worth” to a a country? How much is a social program to prevent starvation? How much are highways and airports? Balancing the needs of the country against the burden of the debt is where everyone has an opinion.
The short answer (now that I’ve made you wade through the rest) is that a smaller (or non-existent) debt would, in fact, make more money available to the economy which should reduce interest rates.
A budget year in which a deficit occurs means that we will increase the debt.
A budget year in which a surplus occurs means that we will not increase the debt.
If we had no debt, a surplus would be a clear indication that taxes were too high, since it was taking in more money than it could spend.
However, with a debt, we get an argument. Some will say that any surplus is an indication that taxes are too high. They generally figure that we can live with the debt that we have, simply paying the minimum obligation. Others say that if we have a debt and a surplus, the surplus should be used to reduce the debt so that the government will not be in competition with other borrowers if times get hard.
I only mention this to show that for a subject like this there are many theories.
I once heard that if we paid down the deficit it would throw us into a depression.
See
Oh, I concur with you, tomndebb, nice answer
Thanks for the answers Tom and kniz. I thought deficit was the wrong word but couldnt think of the right one for the life of me.
Tax-hikin’ beaurocrats wouldn’t have the excuse of ‘paying down the debt’ anymore when they want more of your money (just a joke)!
Nitpick:
If there WERE no federal deficit!! <g>
tomndeb: <<<When the government has to borrow money in order to pay its debts because of a deficit, it competes against corporations and other people for the money to be borrowed and drives up the cost (interest) on the money that it borrows.>>>
So it goes in theory. In practice, I can discern no direct correlation between U.S. debt levels, deficit levels, and interest rates. If anything, the opposite is true.
Here’s how it happened in real life, since 1980.
1981: Reagan takes office. Relatively high interest rates. Relatively low deficits.
1982-83: Recession. Deficits soar. Interest rates decline sharply.
1984-88: Deficits continue to pile up. Interest rates continue to decline slowly.
1989-1993: Bush presidency. Debt continues to pile up, albeit more slowly. Interest rates broadly decline up to about 1995.
1993-2000: Clinton administration. Economic boom from about 1994 forward. Deficits steadily decrease, and are eliminated around 1999. Debt gets paid down. Interest rates steadily increase until January of 2001.
2001: The nation recognizes a national slowdown has occured. Projected surpluses are sharply marked down. What happens to interest rates? They decline sharply.
What’s the missing variable? Inflationary expectations.
The effect inflationary expectations have on interest rates–especially long term interest rates (although it’s probably the single biggest variable the Fed uses when setting discount rates or targeting money supply levels) simply dwarfs that of federal debt levels. Indeed, some say that Keynesian economics (which encourages government to stimulate growth by deficit spending) is itself inflationary.
Second issue:
The absence of federal debt will put an end to social security as we know it. The program will have to be privatized completely or simply done away with.
(Funny how the Gore Campaign simply glossed over this idea. If he paid off the debt completely by 2012, Social Security would have come to an end at that point. He was, essentially, advocating the complete demise of the social security system by 2012. Of course, he couldn’t tell this to his constituency.)
Why will it have to be done away with or privatized? Simple. The mechanism by which the United States runs this intergenerational compact is by investing in a portfolio of bonds. Read: investing in the debt. Social Security contributions buy U.S. debt, and only U.S. debt.
If there are no bonds, then there is nothing to do with Social Security contributions except invest it privately. (No, you can’t just put it in a bank. That’s private investment, too.)
So if you oppose Social Security privatization, then you must also oppose the elimination of the federal debt.
Conversely, if you support the elimination of the federal debt, then you must support the full privatization of Social Security.
I don’t quite follow you, panzermanpanzerman. What’s to stop your government issuing gross debt? This has been an issue in Australia recently and I think our government has decided it will keep official debt markets alive even though net public sector debt will be zero soon*. Is the US government unable to do this?
Secondly, I don’t understand why you say social security couldn’t operate if there were investment in private sector assets. You say that this would be private investment, but the fact that much defence expenditure is privately produced doesn’t mean that it’s not publicly provided. Maybe you are using “privatisation” in a weaker sense than I would?
I would also point out that the identification problem to which you refer contains more than one missing variable.
My answer to the OP? Future generations would face lower taxes and would receive the massive infrastructure of the US into which they are born for nothing. They would be better off and the current generation worse off. There may be other effects, but we don’t know what they are. Economists’ concerns about US debt in the 80s and early 90s were about the sustainability of the path of debt, not about debt per se.
*[sub]To allow a domestic fixed yield component of portfolios. Obviously this is less of an issue in the US since there are substantial corporate bond markets which are sufficently liquid to allow continual asset diversification.[/sub]
<<What’s to stop your government issuing gross debt? This has been an issue in Australia recently and I think our government has decided it will keep official debt markets alive even though net public sector debt will be zero soon.>>
What an idiotic and pointless policy. The government issues a phantom debt to itself, and yet pays itself interest (from where?) in order to keep a charade alive?
Why not simply call it “taxing” and “spending” and be done with it?
And if the government, by issuing “gross debt” is still obligating itself to paying interest on these bonds, then what was the point of paying off the debt in the first place? If you’re still paying interest somewhere, then it’s not really paid off, is it?
<<Secondly, I don’t understand why you say social security couldn’t operate if there were investment in private sector assets.>>
Because it’s against the law. The law requires Social Security surplus to be invested in treasury debt and nowhere else.
George Bush wants to modify that law to allow some investment in private equities. Al Gore opposed the measure, and anything similar, saying Republicans want to “undermine Social Security.”
He also wanted to eliminate the debt by 2012.
He cannot have it both ways.
<<You say that this would be private investment, but the fact that much defence expenditure is privately produced doesn’t mean that it’s not publicly provided. Maybe you are using “privatisation” in a weaker sense than I would?>>
I’m using privatization to refer to investing social security surpluses in private equity and debt markets, which would essentially mean the transfer of control of capital from public control (Treasuries) to private control (equities and corporate bonds).
This is privatization.
What is current rate of inflationf or this year or the coming year?
and is that the same as current cost of living?
Ðave
Another school of thought would suggest that Government should, with all things being equal, try to run a relatively balanced budget in ‘normal’ circumstances and reserve the option of incurring debt (on behalf of its citizens) to exceptional circumstances. Those circumstances would include, for example, expenditure to help pull the economy out of recession and war.
Then, in better times, a taxation rate above Government expenditure would pay the interest and, hopefully, repays the capital borrowed.
In that sense, it could be argued that by having a low level of national debt actually acts as insurance – a nation will have greater scope to borrow (possibly at a cheaper rate.) without worrying the market with the possibility of defaulting.
Also, burdening leaders with debt incurred by previous Administrations (one thinks of Reagan and Bush Senior) restricts the ability of the latter to implement his / her electoral mandate in an unfettered fashion.