Does a large Federal Deficit matter?

[Fred Jones]

Does a large Federal Deficit matter to the continued growth of the economy? Congress is continually passing tax breaks that are steadily increasing the Federal Deficit. Will the U.S. eventually have to pay the piper or will we once again escape.

I don't like deficits and have stated so in the past. Congress has demonstrated no ability to curb spending. The current Administration has displayed no desire to curb the deficit. To top it off, Kerry has no plans to reduce the deficit in the near future if he is elected.

I believe that all Bush tax cuts should be repealed. Pork barrel spending needs to be brought under control. Reducing Social Security is not going to go over well with Seniors, but something needs to be done. If the first wave of boomers is due to retire in 2008, something needs to be done soon. These people, however, have been paying into Social Security probably most of their adult life and want something in return. They are not going to be happy about a reduction in pay, especially if they are planning on Social Security to pay a good percentage of their retirement.

The country needs to start thinking about the Federal Deficit.

Deficits' Bite

http://www.washingtonpost.com/wp-dyn/articles/A56717-2004Jun20.html

By Sebastian Mallaby

Suppose there's an alligator in your neighborhood. He's been around for years, and he hangs out at the far end of your street, feeding on chickens that the local children bring him. The alligator's been there so long, and caused such little inconvenience, that he's receded to a small place in your mind; you casually leave food out on the porch, and the backdoor's wide open. But while your thoughts are elsewhere, the alligator is tripling in size. One day those chickens aren't enough, and he sets off for your bedroom.

I'm reduced to spinning metaphors like this by last week's spectacle in Congress. The House passed a corporate tax bill so expensive and so bad that there's only one way to explain it: Congress has just plain forgotten that we are racking up a national debt that may eventually devour us. The subject of budget deficits is so eye-rollingly tedious, and we've survived so cheerfully until now, that nobody cares anymore. Well, think of it this way: The House bill is the equivalent of dunking your head in the alligator's favorite sauce and going to sleep next to him.

The national complacency that makes this behavior possible owes much to Ronald Reagan. The Gipper ran a deficit that peaked at 6 percent of GDP, dwarfing the current deficit of 4 percent or so. Because we survived the Reagan experience, people assume that we'll emerge with no limbs missing from the Bush one, too. As Dick Cheney reportedly declared, "Reagan proved deficits don't matter."

Things have changed since Reagan's time, however. Reagan misbehaved himself when the baby boomers' retirement was still 25 years away and when the 1983 Social Security fix was thought to have stabilized the system for the next three-quarters of a century. Even so, it took a series of tax hikes, a large peace dividend and an unsustainable dot-com bubble to bring the government's books back into balance.

This time around, we confront a different environment. If all the Bush tax cuts were repealed, we would still face a fiscal nightmare. The first baby boomers become eligible for Social Security in 2008, and Social Security spending is set to rise by fully 2 percent of GDP between now and 2040. That problem is minor next to the projected explosion in federal health costs -- Medicare and Medicaid combined -- which will be hit by the combination of the baby bust and medical inflation. If health care spending rises 2.5 percent a year faster than wages, as it has done recently, federal Medicare and Medicaid outlays will grow by a monstrous 14 percent of GDP by 2040, according to Henry Aaron of the Brookings Institution.

That prospect is so extreme -- it implies a doubling in the federal government's share of the economy and a budget deficit five times the one we have now -- that it won't be permitted to happen. But even if only some of this spending growth occurs, a vicious cycle threatens. More spending means more national debt. More debt means more interest payments. More interest payments mean more spending -- adding to the national debt that boosted interest payments in the first place. The Reaganite belief that tax cuts will force smaller government thus misses half of the story. The opposite dynamic exists too: Tax cuts force government spending up on debt service, increasing the burden of government on the private sector.

How will this mess be managed? If health care spending growth could be brought down to just 1 percent above wage growth, we'd still face a federal deficit equal to about 15 percent of GDP in 2040, according to Aaron -- that's more than triple the current one. Undoing all the Bush tax cuts would shrink that deficit by just over 2 percent of GDP; cutting Social Security benefits by one-fifth would shave an additional 1.5 percent or so of GDP; holding defense spending constant in inflation-adjusted dollars (it doesn't cost extra to defend a bigger economy) would save 3 percent of GDP, because of the projected doubling of GDP over the period. Put these three ambitious savings together, and you've fixed less than half of the problem.

In short, the numbers are terrifying. The Bush deficit has already dragged the national savings rate to its lowest point since World War II, creating what Harvard President Lawrence Summers calls "the most serious problem we have faced in the last 50 years" -- and by 2040 the problem is projected to be three to five times bigger. Yet the House has just passed a pork-laden corporate tax cut that will inflate the deficit by more than $200 billion over the next decade. Sen. John Kerry is running a presidential campaign that pays only lip service to this challenge. And George Bush has a vice president who thinks that deficits don't matter.

Sooner than we realize, the alligator will arrive. The chief thing we have to fear is the lack of fear itself, to borrow another line from Larry Summers.

[Destino]

Pass the buck and let the poor sap that has to raise taxes years from now to take the hit.

[Fred Jones]

Destino,

Unfortunately, that is probably what is going to happen.

[jbooma]

hasn't this been going on since the revolutionary war :doh:

[chiefhogskin48]

To be honest, a defict isnt bad so long as it doesn't exceed the percentage of GDP growth. You can have an increasing deficit that is actually decreasing as a proportion of GDP. It's all relative. An increasing deficit is felt in the short term too, and that is what people dont realize. We DO feel the effects, and we are able to deal with them or at least tolerate them. A large percentage of our taxes goes to paying off the interest on the debt. At some point, if the debt/deficits reach a "critical mass", then politicians will be forced to deal with it. It's not an insurmountable burden that will make the future generations indentured servants.

I am more concerned about our trade deficit, because that is not sustainable.

[flashback]

I sincerely wish Kerry would talk about the deficit. I’ve heard some seriously scary numbers. The gov’t borrows 1 out of every 5 dollars it spends. About ½ of the money borrowed in the US is borrowed by the gov’t. Its going to drive interest rates up, and its going to start this summer. We need some tax cuts to be repealed, and we need to cap spending, and we need to stop corporate welfare and pork-barrel politics. Terrorists can’t bring America down, but what about when we owe China ½ of our GDP?

[Riggo-toni]

The tax cuts have had minimal impact on the deficit. The GOP-led congress' spending (combined with W's unbelievable unwillingness to veto ANY spending bill) is what primarily has caused the deficit.

Do deficits matter? Generally, yes, but...

the major factor as to whether they matter and how much is whether or not the rate of GDP growth vis a vis the deficit causes the debt per GDP ratio to rise or fall. It is better, for example, to have an economy that grows at 4% a year with a deficit at 1% of GDP than to run a balanced budget with a 2% rate of growth, because in the former scenario, the debt/GDP ratio is likely to fall more rapidly, thus making the nation's debt burden more easily serviceable. The best solution, however, is to reduce gov't spending as a % of gdp. This puts more of true wealth into the hands of the private sector, which is the only true engine of growth. Money the government spends will inevitably drain out of the private sector through any combination of higher taxes, inflation, and interest rates.

[chiefhogskin48]

Many European countries run debts that exceed 100% of their yearly GDP. Thankfully, we are not there yet. I believe we are running about 70% though, which certainly isn't good.

Here is a simplistic FAQ of what I'm saying:

http://www.oswego.edu/~edunne/debtmyths.html

[chiefhogskin48]

Riggotoni, of course you are right. I still wonder why Keynes gets as much credit as he does with the idea that the government "creates" something, and with the whole dubious notion of the "multiplier" effect.

[joe]

It makes me laugh to read how we "escaped" the deficit started by Lyndon Johnson and escalated to a $trillion national debt under Ronald Reagan. You all do realized that we never paid off that debt. We started to at the very end of the Clinton years but it was a drop in the bucket. Now the national debt is closer to $5 trillion.

Yeah, it's a problem, something that Greenspan does not want to face before the next election. It remains to be seen whether he will be able to do so.

[chiefhogskin48]

Joe, the idea of "paying down" a debt is ridiculous because it's never gonna happen for more than a year or two. The idea, I think, is to freeze the debt at a certain level or rate, making it increasingly irrelevant in relative terms. To actually pay down a debt would require incredible political balls because it would force people to tighten their belts in the short-term. It's arguable that it could be very bad for the economy, too.

[Bigkatt]

Tax cuts are "NEVER" the problem:)

The problem "ALWAYS" is spending too much:doh:

[portisizzle]

Why don't you just ask us if a mortgage is a bad idea. The deficit is borrowed money, nothing more nothing less. That means we can spend more money on B.S. social engineering. So don't complain about the deficit unless you are willing to discuss what things we need to cut out of spending. (Anybody up for cutting military spending this year?)

Remember this, the goverment will only be able to tax this country so far. Damn, that is why we fought a Revolutionary war in the first place, right?!

I have three kids that are gonna be pissed if they have pay my retirement when I am sixty because I wanted a nice car and house today. Cut us a break and stop spending so much money. Let the people have more of a say.

[Riggo-toni]

Originally posted by joe

It makes me laugh to read how we "escaped" the deficit started by Lyndon Johnson and escalated to a $trillion national debt under Ronald Reagan. You all do realized that we never paid off that debt. We started to at the very end of the Clinton years but it was a drop in the bucket. Now the national debt is closer to $5 trillion.

Yeah, it's a problem, something that Greenspan does not want to face before the next election. It remains to be seen whether he will be able to do so.

Uh, Joe,

You do realize that the debt to GDP ration at the end of Reagan's term was roughly the same as it was in 1960... (approx 60%), and was actually dropping in his 2nd term (until Bush 41 sent it skyrocketing back up)

And that the debt to GDP ratio in the 40s was over 90%.

Originally posted by Hog53

Tax cuts are "NEVER" the problem

The problem "ALWAYS" is spending too much

[/b]

Glad to see your beginning to see the light there Hog. After all, tax revenues increased form $475B to $1 trillion in the 80s - an unprecedented increase in both dollars and %.

The first Bush increased spending at the fastest rate since FDR, and the economy tanked.

During Clinton's tenure as President, GDP spending per capita adjusted for inflation fell for the first time since Eisenhower, and we saw tremendous growth in GDP, the stock market, and real wages as a result. Since Hastert took over in late 98, we've seen discretionary spending go through the roof, and the economy has slowed.

The problem this entire century has always been spending too much. It needs to stop. Unless of course, you agree with things like the gov't spending amillion dollars on an environmental study on the greenhouse effects of cow flatulence (no, I'm not making that up...)

[gbear]

Riggotoni,

Are we really going to have the debate about lowering taxes increasing revenue again?

Art has maintained this for quite some time. However, I called him on it last time with figures from the IRS. He said wait for the next quarter when our economy "took off." I did. The total revenue dropped. Do you want the link again? It's Republican math.

It's almost always accompanied by a point back to Reagan and the income increasing after the tax cuts. This ignores two huge truths: 1) Oil prices which were killing our economy dropped drastically allowing for a boom based on lower energy prices and 2) Reagan actually raised the taxes after his tax break. The latter some what mitgiated the loss in revenue that would have happened if only tax cuts were passed.

You're close to right on the increase in revenue, but it was 519 B in 1980. Still, you're close enough.

[aREDSKIN]

Of course spending is the key. But what else plays here is the financing of the debt. It's gov't bonds and the ability of the bond holders to believe that they will get their money back. Many foreign nations buy our debt why? To sell us more goods. It's no coincidence that the some of the largest bond holders (debt financiers) are the same nations that sell us the most goods. Japan, China etc. Trade imbalances etc. We'll really start to worry when the bondholders don't buy the bonds anymore.

[thew]

You do realize that the debt to GDP ration at the end of Reagan's term was roughly the same as it was in 1960... (approx 60%), and was actually dropping in his 2nd term (until Bush 41 sent it skyrocketing back up)

That's not true. Eisenhower was president in 1960 and he balanced the budget and was a fiscal conservative.

Ronnie did alot of good thing for the money he spent, but let's not embelish and say he didn't spend a lot of coin in pursuit of his goals.

Tax cuts are "NEVER" the problem

The problem "ALWAYS" is spending too much

Logically it's irrelevent because this president does both. You can hate him for cutting taxes while signing record budgets or you can hate him for increasing spending by record amounts while cutting taxes. Personally I think you're wrong. I believe both taxes and fiscal control are needed to strike the balance which economic health, national defensecalls and good governement calls for.

Bush is just clueless: cuts taxes four straight years, and also increase spending dramatically four straight years..

• Increase military spending
  
• Increase domestic spending
  
• Grow the federal governments ranks by 400,000 jobs
  
• Two off budget wars
  

[Riggo-toni]

Gbear,

the big increase in revenues came largely from the 1986 Tax Reform Bill, which lowered marginal rates while simultaneously eliminating deductions. This is the proper formula for increasing revenue: Cut (or just plain eliminate) long term capital gains, while eliminating or at least phasing out deductions for things like mortgages (yes, I'm shooting myself in the foot on that one).

Still, the point isn't really taxes - it's the drag spending causes on the economy by taking capital out of the private sector. Besides meaningless theories that look wonderful on graphs, do you have any empirical evidence to suggest that we can tax and spend our way to prosperity?

[Riggo-toni]

Originally posted by thew

That's not true. Eisenhower was president in 1960 and he balanced the budget and was a fiscal conservative.

Thew, Thew, Thew...

Try and see if you can comprehend this: DEBT TO GDP RATIO NOT DEFICIT TO GDP RATIO

Hypothetically, if we had a balanced budget in 2005, the DEBT TO GDP RATIO might not be that much better than it is now, for example.

GO BACK AND READ MY INITIAL EXPLANATION OF WHEN DEFICITS ARE OR ARE NOT BAD. AND WHAT I STATED ABOUT THE DEBT TO GDP RATIO IN 1960 WAS QUITE TRUE.

[thew]

riggo-toni

Hypothetically, if we had a balanced budget in 2005, the DEBT TO GDP RATIO might not be that much better than it is now, for example.

www.dictionary.com

Hypothetically

Hypothetic \Hy`po*thet"ic\, Hypothetical \Hy`po*thet"ic*al\, a. [L. hypotheticus, Gr. ?: cf. F. hypoth['e]tique.] Characterized by, or of the nature of, an hypothesis; conditional; assumed without proof, for the purpose of reasoning and deducing proof, or of accounting for some fact or phenomenon.

usually one put forward his hypothetical argument and then backs it up with facts which support it. You put forward your hypothetical and use that to support your argument.

GO BACK AND READ MY INITIAL EXPLANATION OF WHEN DEFICITS ARE OR ARE NOT BAD. AND WHAT I STATED ABOUT THE DEBT TO GDP RATIO IN 1960 WAS QUITE TRUE.

Did that. Devils in the details. Yes tax cuts are good in a recession because they put money into the economy. Yes government spending is good in a recession because it puts money into the economy.

Problem... Tax cuts phased in over 10 years don't put the money into the economy fast enough to provide the stimulous to get us out.

Problem... Military spending isn't an effective spending balm as it only provides cash to a very limited amount of the population. The effect on the economy is deluted.

Problem.... Comparing the 1960 era with the 1986 era as you did in one sentice isn't logical. 1960 we were coming off 8 years of balanced budgets and the economy was still on fire from WWII spending. We were coming off of the greatest econmic expansion in world history. The dept you reffer to at the end of 1960 was all due to WWII bills and the bills for rebuilding Europe and Japan. We were just digging outselves out of that dept nightmare in 1960. In 1984 we were digging ourselves in and hadn't balanced a budget for almost 20 years. 1960 not comparable to the Reagan era when trying to draw conclusions about dept to gdp ratios. The ratio is less important than the trend and the trends in the two erra's were totally different..

WWII spending was fiscally unsound. So what, we were fighting for our lives and broke a lot of rules. It worked out because we had a series of good Presidents after the war TRUMAN for eight years and Eisenhower for eight. Also it didn't hurt that all of our economic rivals had production bases destroyed by the war and had to rely on us for everthing to sustain them. Marshal plan didn't hurt us any either..

Saying we had worse deficites ( sorry dept/GDP ratio) in WWII as necons like to say is crazy talk. WWII we nationalized production. Detroit didn't put out a new car for half a decade. Food, gas, and other materials were rationed. Money was no good, you needed ration cupons to buy anything. We were fighting for our lives against three enemies all of whom out gunned us drastically prior to the war.

There is no comparison between then and now. Not for justifying the Bush deficites or dept.

Yes the deficite matters

Yes the huge government spending matters

Every dollar we wast matters and we're wasting a lot of dollars.

[chomerics]

Originally posted by riggo-toni

Gbear,

the big increase in revenues came largely from the 1986 Tax Reform Bill, which lowered marginal rates while simultaneously eliminating deductions. This is the proper formula for increasing revenue: Cut (or just plain eliminate) long term capital gains, while eliminating or at least phasing out deductions for things like mortgages (yes, I'm shooting myself in the foot on that one).

Do you have the Debt/GDP ratio for the past 25 years? I'd like to look at that statistic.

As for the Tax Reform Bill, Reagan pulled the put $.50 in the blind mans cup to take out a dollar. It has always looked apon by mainstream as a tax cut, yet it actually was a tax increase. The amount of deductions decreased dramatically, rent being a major deduction taken away, and a lot of loopholes were closed. This accounted for the increase in the revenues, along with growth, but the majority was from the refoem bill.

[Ancalagon the Black]

Cash solves cap!

Oh wait...wrong thread...

[luckydevil]

Cash solves cap!

Oh wait...wrong thread...!

:laugh:

[gbear]

Riggotoni-

My best example off the top of my head is the privitization of Medicare experiment. Government spent less per person to get the same care.

SO part of the question is whether health is part of your "prosperity." That would be tax and spend t oa higher level of prosperity than you could get through not taxing and spending.

Also, socialist plans don't always involve a tax...taking control/regulating businesses isn't exactly a tax/spend. Energy regulation?

Regulation of natural monopolies on for lack of a better term "business infrastructure?" Want to place a guess on what will happen with our phone bills now that the supreme court has said no regulation (well, they don't have to share access)? Seems like we're heading back to the natural monopoly land only without regulation this time. It will be interesting to see if cell phone tech provides enough competition.

[Riggo-toni]

Originally posted by chomerics

Do you have the Debt/GDP ratio for the past 25 years? I'd like to look at that statistic.

As for the Tax Reform Bill, Reagan pulled the put $.50 in the blind mans cup to take out a dollar. It has always looked apon by mainstream as a tax cut, yet it actually was a tax increase. The amount of deductions decreased dramatically, rent being a major deduction taken away, and a lot of loopholes were closed. This accounted for the increase in the revenues, along with growth, but the majority was from the refoem bill.

I agree completely. The best kept secret in politics is that Reagan passed the biggest ever true tax increase on the wealthy. The perverse thing is this is where you here people talk about how the top 1% had their incomes rise while their taxes went down when what really happened was there was less incentive and far less opportunity for the wealthy to hide their income, so they reported more income and actually paid more in taxes, even though it was at a lower marginal rate. This is, I believe, by far the most efficient way to raise taxes - by reducing or eliminating deduction, NOT by increasing rates.

I'll look for a chart of the ratio. I had one in a book somewhere that went from the 1940 to 1990. It basically looked like a curve with the biggest peak in the 40s with WW2, edging downwards until the mid 60s, and then rising back up with the expansion of the entitlement system under LBJ and Nixon. It peaked again during Reagan's first term, and started to drop off somewhat during his 2nd. From what I know, I'd say you'd see it jump up again significantly during Bush 41, and go down significantly during Clinton's 2nd term, with it back on the rise now under W.

Gbear - All excellent points.