Budget Deficits and the National Debt

Budget Deficits and the National Debt:

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 personal response and critique of these issues.

Deficit and National Debt: Is it a Problem?

In the most general sense, there are probably two major reasons to worry about the Federal deficit and the increasing national debt. The first involves the question of the ultimate solvency of the government and the second involves the negative side consequences for the U.S. economy. The issue of solvency will be analyzed later and the immediate focus will be on the consequences for the economy.

The orthodox position on the deficit is the argument that it is a major problem and must be cured with tax increases (the position of the Democratic party) or cutting spending (the Republican party). Both of these groups maintain that the budget deficit reduces national savings, contrib

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e year 1995. The more important question which such an discussion raises is not the accuracy of the year to year projections but the issue of whether the U.S. government is gradually closing in on some threshold of fiscal distress. It is certainly true, as James Grant has argued, that net interest expense on the federal deficit has been greater in this recession than previously. Such expense was $21 billion in 1974, $85 billion in 1982, and $195 billion in 1991. The same pattern, according to Grant, is evident with gross debt. The overall volume of federal debt securities outstanding was $484 billion in 1974, $1.137 billion in 1982, and $3,599 billion in 1991.[8] In addition, Grant states that between 1983 and 1991 federal receipts grew at the compound annual rate of 7.3 percent, whereas net federal interest expense grew at the compound annual rate of 10.1 percent. In the same period, outlays grew by 6.4 percent a year compounded, whereas gross federal debt grew by 12.8 percent a year, also compounded.[9] Orthodox economic opinion argues that the U.S. government will continue to be able to pay its bills because it can easily borrow enough to cover the deficit. However, the accelerating amount of marketable public treasury

Category: Economics - B