A user named chamcham on Yahoo! Answers asked the following question about why our deficit and national debt are so high. Below is my answer to him:
.....
Why is the federal budget deficit so high?
This really bothers me, and even though I am fiercely anti-democratic, I can not help but feel both parties are to blame. Who the hell do we owe money to, and how did it reach such astronomical proportions???
- Chamcham
Answer, from Michael M:
The US currently operates under modern 'Keynsian' economics. Google John Maynard Keynes for more information. In short, we borrow or (in theory) save money to accelerate or decelerate economic activity.
The deficit is so high because the government spends much more money on defense, entitlements, and operations than it takes in through from taxes, tariffs, and investment income.
This overspending is financed by selling government bonds to anyone who will buy them, including individuals, institutions, and foreign governments, and in some cases by printing money at the Fed.
Under Keynsian economics, the government saves during the good times, and engages in deficit spending during the bad times to help deal with recessions in the business cycle.
Deficit spending during bad times is ok, and helps to deal with unforeseen problems, such as the bank failures that occurred during the depression. So deficit spending per se is not the problem. The problem is that our politicians lack the restraint to save during the good times.
The country needs to have adequate borrowing capacity (at any time) so that we can expand the debt to acceptable levels when needed. This means that the government needed to retire debt during the late 90's and mid 2000's. Instead, it spent recklessly on wars and entitlements, as both the Bush and Clinton administrations did.
It's true that the Clinton administration had several surpluses, but the problem is that the surpluses were a function of an inflated economy. In reality, the surpluses were not large enough to reduce our national debt in a meaningful way. They needed to be larger, or last longer, depending on how you look at it.
My personal opinion is that we are in a pro-growth era, in which it's become politically expedient to 'put the pedal down', rather than be fiscally responsible. Politicians and the fed also seem to fear acting too slowly, and prefer to overcorrect so they wont be accused of not doing anything and everything they can to deal avoid recession. This is part of the growth-at-any-cost mentality that has dominated politics for 30 years. The result has been that the debt balloons and looms in the future. High economic growth or higher savings will be needed just to handle the national debt, and we have little borrowing capacity. The risk for our economy going forward is that without borrowing capacity, we may not be able to react to future economic crises.
The deficit is so high because the government spends much more money on defense, entitlements, and operations than it takes in through from taxes, tariffs, and investment income.
This overspending is financed by selling government bonds to anyone who will buy them, including individuals, institutions, and foreign governments, and in some cases by printing money at the Fed.
Under Keynsian economics, the government saves during the good times, and engages in deficit spending during the bad times to help deal with recessions in the business cycle.
Deficit spending during bad times is ok, and helps to deal with unforeseen problems, such as the bank failures that occurred during the depression. So deficit spending per se is not the problem. The problem is that our politicians lack the restraint to save during the good times.
The country needs to have adequate borrowing capacity (at any time) so that we can expand the debt to acceptable levels when needed. This means that the government needed to retire debt during the late 90's and mid 2000's. Instead, it spent recklessly on wars and entitlements, as both the Bush and Clinton administrations did.
It's true that the Clinton administration had several surpluses, but the problem is that the surpluses were a function of an inflated economy. In reality, the surpluses were not large enough to reduce our national debt in a meaningful way. They needed to be larger, or last longer, depending on how you look at it.
My personal opinion is that we are in a pro-growth era, in which it's become politically expedient to 'put the pedal down', rather than be fiscally responsible. Politicians and the fed also seem to fear acting too slowly, and prefer to overcorrect so they wont be accused of not doing anything and everything they can to deal avoid recession. This is part of the growth-at-any-cost mentality that has dominated politics for 30 years. The result has been that the debt balloons and looms in the future. High economic growth or higher savings will be needed just to handle the national debt, and we have little borrowing capacity. The risk for our economy going forward is that without borrowing capacity, we may not be able to react to future economic crises.
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