Are Deficits Always Bad, Always Good, or Does It Depend?

A quick take on the budget deal that has been reached.

  • We are not presently in a recession. The NBER, the official recordkeeper on the business cycle, says so. Consequently, by definition we are not in a recession.
  • We’ve been in a tepid recovery since June 2009, before disbursement of money under the America Reinvestment and Recovery Act (stimulus package) took place. That means that the ARRA played at most a minor role in preventing a “double dip” recession.
  • It’s more likely that it “time shifted” some economic growth which meant that growth was slower in the period from which the time shifting took place than otherwise might have been the case.
  • Debt burden has probably played a part in slowing U. S. economic growth.
  • According to the CBO the new budget deal will probably result in a deficit of nearly $1 trillion in 2018.
  • Since we’re not in a recession, there is no shortfall in aggregate demand and for the additional deficit spending to increase future growth it would need to be invested. Business investment has been slack for quite a while.
  • The increase in the deficit will definitely increase debt which will provide additional headwinds against growth.
  • It could be that other factors will outweigh those headwinds.

Or, said another way, I don’t think that deficits are always bad or always good but somewhere in between, dependent on circumstances. We’re now engaged in a great experiment in deficit spending and indebtedness. I hope it turns out well but I fear it won’t.

5 comments… add one
  • Guarneri

    Well then, defining those circumstances matters.

    A dollar of debt in a trillion dollar government doesn’t matter. Debt of 50% of GDP may not matter, other than the inefficiencies that underlie the creation of that debt. But like corporations, governments can have a maximum debt capacity, with taxes being the analog to equity financing and internal cash flow, and debt, well, debt.

    The current concerns are that we are approaching that debt capacity. I doubt there is a bright line distinction. But inability to service or refinance the debt is a death spiral. One can take the position that money can simply be printed, but then we get to engage in a different experiment. In an increasing velocity environment can you really print money at the required rate?

  • The current concerns are that we are approaching that debt capacity. I doubt there is a bright line distinction.

    My rule of thumb is that you shouldn’t take on more debt to pay operating expenses. That’s why I’ve been arguing for a more targeted approach, something that applies both for tax cuts and spending increases.

  • BTW, the Swiss, the most generous of people and possibly the most tolerant of immigrants, consider being annoying sufficient reason to deny granting citizenship to an immigrant. They require a solid command of one of Switzerland’s four languages (German, French, Italian, Romansch—I’d love to meet the emigrant to Switzerland with a good command of Romansch), ten years residency, and demonstrated assimilation to the Swiss way of life.

  • TastyBits

    The private creation of money is the problem. Abolish the credit backed monetary system, and problem solved. If not, impose money creation regulations and outlaw foreign purchases of US debt.

    Kinda related:
    Perhaps, if more people could afford to pay for their healthcare, the deficits would not be so large. Of course, people would need well-paying jobs.

  • Andy

    At some point it will be unsustainable. Can we predict when? Unlikely.

    Servicing the debt is growing more expensive. Last time I checked it is about $250 billion a year.

Leave a Comment