“A deficit is what you’ve got when you don’t have as much as you had when you had nothing”

By John Lohr

 

Some news talking heads have been saying that the Administration should be worried about reducing the deficit, not adding to it by fixing the broken health care system.  Obviously they don’t know anything about the deficit, or economics, either.  In a rare lucid moment some time ago Dick Cheney  said that “deficits don’t matter,” and he was right!  Let’s define it and clarify some misconceptions.

What is the deficit?  It is the difference between the income the government receives (our taxes), and the amount they are spending.  In short, think of it as a giant Visa card.  Deficit spending is not unique to government; we do it all the time.

Where does today’s deficit come from?  90% of the $11 trillion in federal debt accumulated to date comes from the Reagan, Bush I and Bush II administration policies of expensive wars and irresponsible tax cuts (see www.treasuredirect.gov).

Does a balanced budget eliminate the deficit?  No.  Just like your personal finances, it would only mean that you are spending only what you take in (or less like in the Clinton 90s), but that doesn’t really help matters much.  The accumulation up to then is still there, just like your credit card bills.

How does the government pay for the deficit?  Two ways:

(1) Print more money—(A bad thing—causing inflation that makes our money worth less).

(2) Sell Treasury bonds, notes and bills, on which the government must make interest payments (like we do on our credit cards).

The deficit is a bad thing.  No.  Most economists recommend deficit spending as the best way to end a recession.  In times of high unemployment like now, deficit spending stimulates an increase in consumer spending, which creates an increase in the demand for business products, thus raising the Gross Domestic Product (GDP) and stimulating employment.  Economists believe that if the government’s deficit is spent on things such as infrastructure, public health, and education, the business output will increase.  If the government borrows money to cure a severe recession, and pays for public health, infrastructure like roads (even Hart Street), or better schools, the vast majority of economists agree that the deficit is beneficial.

Paying down on the deficit is a desirable thing.  No.  Operating at a surplus or paying off a deficit reduces consumer and business spending and raises unemployment.  Although the inflation rate may decline, we would have less disposable income.

Deficit spending creates higher inflation.  Not entirely.  During periods of low unemployment (3%, not like today) deficits may encourage inflation, but so will oil crises, inadequate money supply and high inflation in other major countries.

Selling Treasury bonds, bills and notes is mortgaging our children’s future.  The Treasury securities sold this week will come due some time in the future, and the debt must be paid back.  The way in which our government pays off the debt is by issuing more bonds, notes and bills.  While it may sound like a Madoff ponzi scheme, this is the way our country has been financed since 1789.  If you want to call that mortgaging our children’s future, well, just think of it as passing on the mortgaged future you inherited.

So what?  When you hear special interest congress people pounding the table about “red ink” and “wallowing in debt”, or you see our ill-informed Press flaunting scary charts and graphs about our debt problems, tune them out (or off).  What really matters is not how much we’re spending, but what we’re spending it on.