THE BUDGET BATTLE : Deficit and Debt: A Primer
In the time it takes to read this sentence, the national debt will have increased $20,000. The colossal growth in federal budget deficits is directly responsible for the ballooning of the national debt--now hovering around $4.9 trillion.
Disagreements between Congress and the President over how to craft balanced budget proposals to control borrowing have sparked two government shutdowns and ignited a heated debate among economists on the merits of eliminating the deficit. Some economists argue it is economically unsound to eliminate the shortfall, while others say doing so is imperative to lessen the burden on future generations. A look at the pros and cons of deficit spending:
PROS
* Borrowing to build infrastructure and to finance research encourages businesses to invest in communities. A balanced budget would prohibit Congress from borrowing for long-term investments.
* Some argue that a balanced budget would not force the government to operate like a business when in fact many businesses borrow heavily to operate.
* The deficit won’t burden future generations because if they retire the debt they would be paying themselves--as more than two-thirds of the federal debt is held by the public.
* A zero-deficit policy would prevent public spending to make up for a shortfall in private spending during a recession. Without the tool of borrowing, Congress would be forced to raise taxes or cut spending.
* Foreigners do not view U.S. markets in a bad light because of its burgeoning deficit, as they own portions of this debt.
* Government borrowing to finance the deficit does not crowd private individuals out of the competition for a finite supply of credit because the markets can accommodate everyone.
* The connection between government borrowing and higher interest rates is not clear, proven by a bull market in 1995 that displayed little anxiety over the current level of the deficit.
CONS
* Deficits cut into credit markets, reducing money for business expansion and increasing interest rates.
* The deficit is a burden for future generations--who could face a tax bill on the order of 84 cents out of every dollar they earn early in the next century if deficit and entitlement spending grow unchecked.
* Buying government bonds does not produce income for future generations because a government note is not an asset but an IOU and requires Congress to borrow from other taxpayers to pay bondholders off.
* In 1950 the payroll tax was 3% and today it is 15%. This tax could reach 40% if the debt isn’t brought under control.
* Wholesale borrowing from other countries has averted catastrophe, but has transformed the U.S. from the world’s largest creditor to the world’s largest debtor.
* Deficits fuel inflation.
The deficit, or the difference between what the government takes in in revenue and what it spends in a given year, has exploded since the early 1980s. The debt, or the total of all accumulated deficits, more than tripled in the same period. A look at the explosive growth of deficits and the debt over the last 55 years:
GROSS FEDERAL DEBT
In billions of dollars:
1940: $50.7 billion
1996*: $5.3 trillion
FISCAL YEAR SURPLUS OR DEFICIT
In billions of dollars:
1940: -$2.9 billion
1996*: -$196.7 billion
* Note: Through fiscal 1976, the fiscal year was July 1 through June 30. Beginning in October 1976 (fiscal 1977) the fiscal year was Oct. 1 through Sept. 30. The three-month period from July 1, 1976, through Sept. 30, 1976, is a separate fiscal period known as the transition quarter.
** Estimate
Sources: “Budgeting for America,” John Cranford; Economic Report to the President; Laurence Kotlikoff, professor of economics, Boston University; Norman Robertson; Times reports; Charles Whalen, resident scholar, the Jerome Levy Economics Institute; Michael Zweig, professor of economics, State University of New York at Stony Brook
