Deficit Spending is Not the Answer

Deficit spending is not the answer. I was once excoriated in a comment for one of my articles about deficit spending. I was told that deficit spending is so basic that they teach it in high school economics. Maybe they did, that wouldn’t surprise me considering the same people who are running Washington these days are the same people who are mostly in academia.

The theory behind deficit spending is a flawed theory. Deficit spending entails borrowing money to get out of debt. For the individual this would be like taking out credit card after credit card, living beyond ones mean, and then taking out another credit card to get out of all the debt. Except that it is worse when it comes to the federal government. There is no one that can stop the government from borrowing.

This deficit is taken on from the world market, increasing public debt, private sector net worth, debt service, and interest rates. Short term gains are to be had from temporary deficit spending, but long term deficit spending is disastrous economic policy.

The United States has been living on borrowed credit for too long. President Clinton was the first President to balance the budget in several decades, with the inauguration of Bush that did not last long. Heritage Foundation sums up the deficit spending pretty nicely:

· President Bush expanded the federal budget by a historic $700 billion through 2008. President Obama would add another $1 trillion.

· President Bush began a string of expensive financial bailouts. President Obama is accelerating that course.

· President Bush created a Medicare drug entitlement that will cost an estimated $800 billion in its first decade.President Obama has proposed a $634 billion down payment on a new government health care fund.

· President Bush increased federal education spending 58 percent faster than inflation. President Obama would double it.

· President Bush became the first President to spend 3 percent of GDP on federal antipoverty programs.President Obama has already increased this spending by 20 percent.

· President Bush tilted the income tax burden more toward upper-income taxpayers. President Obama would continue that trend.

· President Bush presided over a $2.5 trillion increase in the public debt through 2008. Setting aside 2009 (for which Presidents Bush and Obama share responsibility for an additional $2.6 trillion in public debt), President Obama’s budget would add $4.9 trillion in public debt from the beginning of 2010 through 2016.

Niall Ferguson who is a professor in the Harvard business school had this to say about the current deficit spending:

“The critical point is if your policy says you’re going run a trillion-dollar deficit for the rest of time, you’re riding for a fall…Then it really is goodbye.” A dashing Brit, Ferguson added: “Can I say that, having grown up in a declining empire, I do not recommend it. It’s just not a lot of fun actually—decline.”
Ferguson called for what he called “radical” measures. “I can’t emphasize strongly enough the need for radical fiscal reform to restore the incentives for work and remove the incentives for idleness.”

Obviously long term deficit spending is not the answer.  To put the national debt in perspective, the US national debt as of July 28, 2010 was $12,263,363,023,888.74, or in other words each US citizens share of the debt is $42,947.60.  The National Debt has increased $4.12 billion per day since Sept. 28 2007.  Is this sustainable?  Is this deficit spending worth out?  Is it working?  Will every man women and child be able and willing to pay over $42,000 to pay off the debt?  Where is the job creation?  Where is this growth? 

Under Bush 1.8 million jobs were lost, under Obama 4.4 million jobs were lost.  Under Obama the debt to GDP ratio reached its highest level since WWII, sitting at a posh 62%.

So now we come to the report released by the CBO on the 27^th of July:

“Over the past few years, U.S. government debt held by the public has grown rapidly—to the point that, compared with the total output of the economy, it is now higher than it has ever been except during the period around World War II. The recent increase in debt has been the result of three sets of factors:

1) an imbalance between federal revenues and spending that predates the recession and the recent turmoil in financial markets,

2) sharply lower revenues and elevated spending that derive directly from those economic conditions,

3) and the costs of various federal policies implemented in response to the conditions.1

Further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades.

…a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget,

and the government would thereby lose its ability to borrow at affordable rates.

…By 2020, debt would equal nearly 90 percent of GDP. Debt held by the public would exceed its historical peak of about 110 percent of GDP by 2025 and would reach about 180 percent of GDP in 2035.”

I quoted extensively from that article and highly encourage everyone to take a serious look at the dire warnings given to us by the CBO. The report goes on to detail other countries who have experienced similar conditions as we are experiencing, what it might mean for the US if things don’t change etc.

Long term deficit spending is not the answer, it is the answer of the ignorant. If you want to see long term deficit spending in action look at Greece, look at California, or look at Spain! The real answer is that we as a nation need to tighten our belts and get to work paying off the national debt. We need to make short term sacrifices for long term rewards it is the only way.

Am I right to be outraged concerning our level of national debt, or am I just a simpleton who didn't listen in high school economics?  Please leave comments and let me know what you think.

The reports f)or economic growth for this last quarter just came out today (July 30), and it is not good.  The economy grew by only 2.4%.  While it is a good thing that the economy grew, it needs to grow by at least 3% to create jobs, and drive down jobless claims. So much for spending our way out of a recession.