Should the government balance the budget? This has become a critical issue between the president and the Congress, with both sides agreeing that the current budget deficit is too high, but with disagreements as to how long should be taken to balance the budget, and what measures should be used to arrive at a balanced budget. Simply put, the budget deficit indicates that the American government is borrowing money in order to pay its bills, and it has a current debt in the trillions of dollars (Heinemann, 1995, p. 8A). While most Americans agree that the federal debt level should be reduced, few understand the reason that the debt represents a significant problem for the economy as a whole. This research examines the issue of budget deficits, and considers whether the current moves in Congress and by the Administration are appropriate.
According to economic theory, budget deficits should result in an increase in interest rates. This is because as the deficit rises, demand (by the government) for funds increases, which drives up the price (interest rates) that the government is willing to pay for those funds (Belton, & Cebula, 1995, p. 4).
Borrowing by the government is accomplished by government auction of bonds. Savings bonds are one form of borrowing in which the government indulges; Treasury-bills (T-Bills) are another. Both are heavily favored by conservative investors because they are backed by the United States government.
In recent years, short-term interest rates have been unaffected by federal deficits because the government's borrowing is not short-term, but long-term. However, there are other considerations which affect interest rates besides the federal deficit, one of which is the transfer of capital from country to country. In recent years, this exchange of capital has apparently offset the effect of the federal deficit on interest rates, with the result that interest rates have remained relatively low e...