Unemployment, inflation, and economic growth obviously bear on the quality of our lives, but few Americans can identify how federal budget deficits and public debt affect them personally. Nevertheless, many people are upset because our federal budget has been awash in red ink.

 

            The budget deficit is the annual difference between federal outlays and receipts (G - T). The sum of annual deficits during the 1980s exceeded the totals piled up by all presidents from George Washington through Jimmy Carter. National (public) debt results from cumulated federal deficits. National debt has roughly quadrupled since 1980, and will surpass $5 trillion by the end of 1995.

 

            Critics of huge federal deficits and astronomical public debt argue that organizations that spend more than their receipts are doomed, asserting that the federal government should be run "more like a business", or at least balance its budget like state and local governments. A pattern is developing. Between 1985 and 1994, three major "budget reduction laws" were enacted, each intended to eliminate federal deficits "within five years." In each case, the budget laws passed for the next year or two amended the act, postponing the day of reckoning. Then, when it became patently obvious that the budget target in the particular act was totally out of reach, eleventh-hour negotiations culminated in passage of yet another piece of legislation. Are huge budget deficits really cause for concern? Or are deficits and the debt just political issues used to bash incumbent officeholders around election time?

 

            How can the federal government finance persistent deficits for decades? What consequences follow binges of deficit spending? When, if ever, is a deficit desirable? Have linkages between budget deficits and deficits in our international trade caused us to sell U.S. resources to foreigners wholesale? Must future generations of Americans pay for our free-spending ways?

 

Recent Growth of Deficits and Debt

 

Federal deficits are increasingly common and surpluses, increasingly rare, despite biannual pledges from political candidates that they will balance the budget. Figure 1 traces the recent history of deficits and total interest-bearing public debt. The federal budget has been in deficit 90 percent of the time since World War II---our most recent surplus occurred in 1969.

 

Figure 1  Budget Deficits and the Public Debt

Budget deficits from the 1950s through the 1970s were considered enormous at the time, but they have been swamped (even after adjustments for inflation) by more recent deficits. National debt has almost quadrupled since 1980.

 

Source: Economic Report of the President, 1994.

 

            Political battles over the budget usually pivot on spending priorities instead of curbing the deficit. Whose programs will be sacrificed? For example, Presidents Ford and Reagan both sought to build up national defense and urged cuts in transfer programs to reduce deficits. Congress, however, resisted cuts in transfer payments. The result? Record deficits and soaring debt because both defense and transfer spending grew. The demise of  the Cold War in the early 1990s gave President Clinton latitude to slash the defense budget, but sharp cutbacks in real defense spending did little to reverse the deficit. Instead, most of the so-called "peace dividend" was used to expand the federal government's role in battling crime, providing medical insurance, and building technological infrastructure (e.g., subsidies for an "information highway").

 

            The continuing growth of public debt worries many people. In 1992, Ross Perot garnered almost 20 percent of the presidential vote by harping primarily on the single issue of government deficits. Our previous analysis, however, suggests that deficit spending may facilitate recovery from a recession. Almost all modern economists are convinced that Herbert Hoover and the Congress erred when they raised taxes to balance the fiscal 1933 budget---the economy quickly sank to the lowest point of the Great Depression.