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Federal Deficit & National Debt
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Essay Subject:
Examines various aspects of the causes of, possible solutions for, & potential impacts of the national debt & federal budget deficit.... More...
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Paper Abstract:
Examines various aspects of the causes of, possible solutions for, & potential impacts of the national debt & federal budget deficit.
Paper Introduction:
Budget Deficits and the National Debt:
Consequences for the Economy
Introduction
The candidacy of H. Ross Perot succeeded in placing the issues of budget deficits and the accumulating national debt on the political agenda. The debate over the nature of the deficit, its magnitude, and its consequences for the national economy have been raging in the economic community for quite some time but the issue now appears to have entered the more general public dialogue. The analysis which follows attempts to define the different economic perspectives on the national debt and deficits. It evaluates the differing perceptions of the consequences of the debt and deficits for the U.S. economy and concludes with a
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So, according to Barro,just about all of the tax reduction would be saved. 12. ByFiggie's projections it will reach $6,56 trillion in 1995 and $13, 21trillion in 2 . Thefirst involves the question of the ultimate solvency of the government andthe second involves the negative side consequences for the U.S. Barrow would seem to argue that there would be noeffect. economy.The issue of solvency will be analyzed later and the immediate focus willbe on the consequences for the economy. Using Barro'sreasoning, one could suppose that the Federal government were to announcethat it was reducing everyone's taxes this year, that it would cover therevenue loss by selling one-year bonds, and that it would levy a specialtax surcharge next year to pay off the bonds. has been able to issue its debt in its owncurrency and therefore it refunds but it does not reschedule. This year it topped $4 trillion. Swanson, Bankruptcy 1995: The Coming Collapse of America and How to Stop It (Boston: Little Brown and Company, 1992), pp. government debt. Thus thelarger deficit in the second case will not lead to a higher consumption byeither the public or private sector. Such numbers would mean deficit forecasts of $85 billion for theyear 1995. certainlydoes have a trade deficit and the U.S. 1 , No. probably does not hinge on whether the ratio of publicly held federaldebt to GDP increases a few extra percentage points in the next few years,if such a stimulus is in the interest of an economic recovery that wouldmake the economy strong enough to allow serious deficit reduction in thefuture. If savings fall, then either domesticinvestment, foreign investment, or both must give. may be able to continue to borrow to pay its billsmay be approaching a threshold of danger. This would also happen at a time when theFederal Reserve was trying to lower interest rates again and pump inliquidity. Yet, one returns to the arithmetic fact that the debt will continueto grow barring a budgetary surplus. Swanson, Bankruptcy 1995: The Coming Collapse of America and How to Stop It (Boston: Little Brown and Company, 1992), pp. 25, 1992), pp. government willcontinue to be able to pay its bills because it can easily borrow enough tocover the deficit. The empirical material on the volume of marketable public treasurydebt required begins to raise the issue of whether there is a point atwhich both the domestic and international financial markets begin toconsider rejecting U.S. Barro, "Federal Deficit Policy and the Effects of Public Debt Shocks," Journal of Money, Credit and Banking, (Nov. Both ofthese groups maintain that the budget deficit reduces national savings,contributes to the trade deficit, and should therefore be eliminated.[1] More unorthodox positions are also articulated in the economiccommunity on the left and the right. economy would fall back into a more serious recessionsometime within the next few years. Bernstein, "Abolish the Deficit," Challenge (May/June, 1989), pp. Thus, Eisner concludesthat the U.S. According to Figgie's numbers, the debt firstscaled the $1 trillion mark in 1982. Supposedly owners of government bonds all understandthat the higher interest rate they receive is offset by the erosion in thevalue of the bonds by inflation, so they will not feel richer. If themeasures taken to cut deficits, actually diminish GDP, raise unemploymentand reduce future oriented activities of governments, businesses, andhousehold, then the very goals for which deficit reduction was originallyundertaken, are undercut. The recently introduced economic initiatives by President Clinton aresupposedly tilted toward investments public and private. Consequently, oneapparent repercussion of the decline of U.S. Boskin "Free Markets: The Way to Sustainable Growth," Challenge (May-June, 199 , pp. The more important question which such an discussion raises is notthe accuracy of the year to year projections but the issue of whether theU.S. 682-685. 54-55. However, Robert Eisner for example, coming froma more liberal persuasion, has argued that the deficit is a statisticalillusion. See Robert J. 21, 1992), pp. He rests his case on the effects of inflation in raising themeasured deficit and the difference between the current and capitalexpenditures of the government. Barro, "Federal Deficits, Interest Rates and Monetary Policy," Journal of Money, Credit and Banking (Nov. The reason for this isthat the U.S. An anti-tax bias in publicpolicy and the acceptance of this by an informed public, combined withcontinually increasing negative cash flow, could eventually result in asituation where economic weakness and domestic policy begin to clash withexternal requirements. government is supposedly nowhere near being unable to pay itsbills, because it can easily borrow enough to cover the deficit. Ibid. In the most general sense, there are probably two major reasons toworry about the Federal deficit and the increasing national debt. 47-54. 1-47. Everyone would realize that their higher income this year will beoffset by lower income next year, and that they would need to put aside thecurrent tax rebate to pay the higher future taxes. Robert Eisner, "Will the Real Federal Deficit Stand Up?" Challenge, (May-June, 1986), pp. Gordon, Macroeconomics (New York: Harper Collins), 199 , pp.44-47Grant's Interest Rate Observer (Vol. 1985), pp. 3. 4. Thatwould be up from $61 billion in fiscal 1992, a rate of $153 billion aquarter.[11] However, up to this point at least, economists, politicians, andfinancial analysts have worried about the federal debt mountain, but rarelyis any auction oversubscribed by a factor of less than two-to-one. Even so, total issuance would still reach $834 billion in 1997and more than $1 trillion in the year 2 up from $6 billion in 1992.Evaluation and Conclusion This discussion has indicated that the most negative probableconsequence of the budget deficit, from the orthodox perspective, is itseffect on national savings. Boskin "Free Markets: The Way to Sustainable Growth," Challenge (May- June, 199 , pp. The debate over the nature of the deficit, its magnitude, and itsconsequences for the national economy have been raging in the economiccommunity for quite some time but the issue now appears to have entered themore general public dialogue. Barro, "Federal Deficits, Interest Rates and Monetary Policy," Journal of Money, Credit and Banking (Nov. 1- 47.----------------------- 12 Elliot, Reduction in U.S. indicates that Washington is probablythe world's largest negative cash-flow enterprise. 4-5.11. Taking a somewhat more objective look at such numbers, the issuebecome not whether the public debt has grown too fast but whether it willgrow as fast as Figgie predicts. Ibid. 7. 1-2 6;Robert J. 2. 6. government is gradually closing in on some threshold of fiscaldistress. A scenario that generates such expectation consists of expansionaryfiscal policy and accommodative monetary policy for recovery, followed bydeficit reduction and appropriately easy monetary policy in prosperity.The much discussed economic recovery of 1983-1988 was driven by fiscaldemand stimulus massively greater than any pervious peacetime fiscalexpansion. 13-3 ; Robert Eisner (New York: The Free Press, 1986). The economic thinking of the new Clintonadministration appears to be based on the idea that deficit reductionexpected in the future, during prosperous times, would be quite favorableto aggregate demand and economic activity in 1993, provided that theFederal Reserve's monetary policy was expected to assure interest ratessufficiently low to make up for the future demand last by fiscal austerity. 25, 1992), pp. 682-685.M.J. It is certainly true, as James Grant has argued, that netinterest expense on the federal deficit has been greater in this recessionthan previously. Between 197 and 198 it was 9.1percent, and between 198 and 1992 it was 13.3 percent.[7] However, thisanalysis assumes that such a trend will continue and, in fact, accelerate.A little quick math reveals that, to reach the Figgie target of $6.5trillion in 1995, the debt would have to grow at 17.3 percent a year overthe next three years and to reach his figures for the year 2 it wouldhave to grow at a compound annual rate of 15.7 percent over the next 8years. saving has been the growingdependence on foreign capital to finance investments--which is the flipside of the unprecedented trade deficits of the 198 s. Elliot, Reduction in U.S. Domestic Spending (Edison, NJ: Transaction Books, 1982).H.E. The orthodox position on the deficit is the argument that it is amajor problem and must be cured with tax increases (the position of theDemocratic party) or cutting spending (the Republican party). Such expense was $21 billion in 1974, $85 billion in1982, and $195 billion in 1991. In thesame period, outlays grew by 6.4 percent a year compounded, whereas grossfederal debt grew by 12.8 percent a year, also compounded.[9] Orthodox economic opinion argues that the U.S. Figgie and Swanson, pp. ReferencesRobert J. The overall volume of federal debt securitiesoutstanding was $484 billion in 1974, $1.137 billion in 1982, and $3,599billion in 1991.[8] In addition, Grant states that between 1983 and 1991 federal receiptsgrew at the compound annual rate of 7.3 percent, whereas net federalinterest expense grew at the compound annual rate of 1 .1 percent. One can imagine some ominousscenarios if the U.S. 9, 1991), p. 1 , No. does not have any deficit problem if it is measuredcorrectly. Grant's Interest Rate Observer (Vol. 1 , No. It took two main forms: consumption by affluent taxpayersenjoying lower tax rates and a rapid buildup of defense spending. 198 ), pp. Endnotes 1. Ibid.1 . Domestic Spending (Edison, NJ: Transaction Books, 1982). 34.Grant's Interest Rate Observer (Vol. 1-2 6; and James Grant, Money of the Mind (New York: Farrar, Straus and Giroux, 1992). Heilbroner and Peter L. They argue that this could produce the mood of the mid-198 s whendoubts were frequently expressed about the willingness of foreign investorsto continue lending to the U.S. 12-2 ); and J.W. The optimisticassumption that the U.S. In addition, he believes that the really damaging problem isnot the deficit but the attack on the deficit, which distorts publicpriorities.[3] On the right, individuals such as Robert Barro, from Harvard, alsoappear to argue that the size of the deficit is irrelevant. Bernstein, "Abolish the Deficit," Challenge (May/June, 1989), pp. Inaddition, the federal debt is supposedly not growing fast enough toundermine solvency anytime soon. Note: The change to pitch (1 ) and font (1) must be converted manually.Budget Deficits and the National Debt: Consequences for the EconomyIntroduction The candidacy of H. 34. Barro, "Federal Deficit Policy and the Effects of Public Debt Shocks," Journal of Money, Credit and Banking, (Nov. Robert J. 747-762; and Robert J. Figgie and G.J. 54-55."World Economy: Fear of Finance," The Economist (Sept. It evaluates the differing perceptions of the consequences ofthe debt and deficits for the U.S. It would then be conceivable under these circumstances that theautomatic fiscal stabilizers that have been used to contain recessionarydownturns might actually become destabilizing, because they would addpowerfully to the threat of a collapse of the dollar, along with the bondand stock market.[12] Today the budget of the U.S. 4-5.James Grant, Money of the Mind (New York: Farrar, Straus and Giroux, 1992).Robert L. When the Reaganadministration cut taxes without cutting aggregate spending, privatesavings did not rise--they fell. Grant's Interest Rate Observer (Vol. Such a perverse result is likely if deficit reduction measures areintroduced while the economy is as weak and as constrained by effectivedemand as it possibly is now. Unlike acountry like Brazil, the U.S. 21, 1992), pp. Eisner then raises the question of whetherthe government really does the economy any more harm in the second casethan in the first. Grant states that between 1981 and 1992 thedeficit, the annual refunding, and total federal issuance grew at compoundannual rates of about 13 percent. He believes that one should not count this aspart of the government's current expenditure any more than a firm'sinvestment spending is counted against its profits. would suffer the same humiliation of New York City,which in the summer of 1975 lived from one suspenseful revenue note auctionto the next. The analysis which follows attempts todefine the different economic perspectives on the national debt anddeficits. The same pattern, according to Grant, isevident with gross debt. What would be the effect onconsumer spending? "World Economy: Fear of Finance," The Economist (Sept. The issuance offederal debt has grown, not only in terms of the new debt (known as thedeficit), but also in terms of the old, maturing debt. The Federal deficitwould rise, but so would private saving, and national saving would beunaffected. Moreover, Barro's theory requires thatthe ordinary household be extremely well-informed about the future taximplications of current government spending, to a degree that seems highlyunlikely. 8. But, lets be optimistic for a moment.One could maintain that the past decade's growth rate in total federalissuance would be halved (using Grants figures) to 6 percent from about 13percent. From such a perspective, Barro contends that changes intax rates have no effect on national saving and what really matters is howmuch the government spends, not how much it collects in taxes.[4]Debt, Deficit, and Solvency The more orthodox economic community focuses its concern about thedeficit on its negative effects on savings. Gordon, Macroeconomics (New York: Harper Collins), 199 , pp.44-47; M.J. One picture recently presented by The Economist was the following.Starting from a fiscal position of a deficit of nearly $4 billion, athreatened depression would produce outlandish forecasts of deficits tocome. 9, 1991), p. However, it should also be pointed out that deficit reduction is notan end in itself. This same community is alsoconvinced that there should be no concern about the deficit, the nationaldebt, and the ultimate solvency of the country. This is the debtthat is not repaid but "refunded." To refund a maturing obligation is toreplace it with a new obligation.[1 ] Grant estimates that in 1992 thedeficit was $29 .2 billion and the volume of debt rolled forward (andrefunded) was $319.6 billion. A major rationale for such a policy is to improve theproductivity, real wages and living standards of future generations. 198 ), pp. 13-3 ; Robert Eisner (New York: The Free Press, 1986).J.W. If total debt issuance continued to growat the rate of 1981-1992, by 1997 the treasury would be issuing $1,12 billion of marketable securities a year, or $28 billion a quarter. The mainstream of both the economicsprofession and the political community condemns the deficit and theincreasing national debt. Ibid.; and Robert L. He maintains that the government itself does notconsume any more goods and services. 1 , No. Yetneither of these uses of resources left in its wake lasting gains in futureproductivity and growth. economy and concludes with a personalresponse and critique of these issues.Deficit and National Debt: Is it a Problem? As far as the inflation issue isconcerned, Eisner argues that one should imagine a government with a totaldebt of a trillion dollars, paying 4 percent on the debt, so that its totalinterest bill is $4 billion. See H.E. As a result, evenif a critic of the definition of the budget deficit like Eisner is correctin saying that maybe there isn't any government deficit, the U.S. 1985), pp. And since national saving is simplyincome less consumption, the higher measured deficit will not have anegative effect on national saving.[2] Eisner's other major point is that a good chunk of governmentspending is investment, not consumption: building roads, aircraft carriers,and other long-lived assets. 9. Figgie and G.J. 12-2 )Robert Eisner, "Will the Real Federal Deficit Stand Up?" Challenge, (May- June, 1986), pp. Heilbroner and Peter L. cannot do much about this deficitunless national savings is raised. 5. However, the accelerating amount of marketable publictreasury debt which is needed is enough to give one pause. If his analysis is right, it would appearthat Washington D.C. 747- 762;Robert J. Figgie appears accurate when he notes that between 195 and196 public indebtedness grew at 1.2 percent per year. Nor does the larger deficit encouragehigher consumption. The total issuance was therefore in theneighborhood of $6 billion. The future of theU.S. Ross Perot succeeded in placing the issues ofbudget deficits and the accumulating national debt on the political agenda. Critics like Barro seem to be wrong empirically. Between 196 and197 , it was 2.7 percent per year. However, in recent years a number of financial analysts have begun toquestion this assumption.[5] A typical thesis is the argument that publicfinances are wreaking havoc and sowing the seeds of the next inflation.[6]A supposed bellwether index of ruination is the gross public debt, which isdefined as the sum of the government's borrowing from public investors aswell as government agencies.
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