Do they? It sounds like a rhetorical question, but many advocate deficit spending to pay for such things as infrastructure, social programs, and economic growth. Except for four crazy years (1998-2001) the federal government has spent more than it has earned every year since 1968. Is deficit spending justified, or are our politicians merely irresponsible? The White House just announced a projected half a trillion dollar budget deficit for 2009, so this question is more important than ever.
Deficit spending is a nice sounding term for borrowing money so government can spend more than it earns. Regular people do this all the time and it’s mainly considered bad. A long held virtue, and bit of financial wisdom, has always been to spend within your means, or personal budget. Does the logic change when public servants are charged with spending public funds (money that is not really theirs)?
Sources: Congressional Budget Office (CBO), Office of Management and Budget (OMB)
The chart shows that President Bush is taking the country into uncharted deficit territory in the last year of his presidency. The country has never spent $500 billion more in a year than its earned. However, in terms of gross domestic product (GDP, i.e. what the country produces) the deficit is bad, but not the worse we’ve seen. The mid 70’s through mid 90’s were generally worse.
Nonetheless, we should all have apprehensions about our country’s fiscal condition. There’s a reason why the U.S. dollar has dropped disastrously relative to other currencies over the last few years. The world is beginning to suspect that the United States is being run like a banana republic.
In The Only Three Questions That Count, Ken Fisher likens the national balance sheet to that of a company. He takes the financial axiom that as long as the return on capital is greater than its cost, it makes sense to invest. In this case, if America is earning a greater return on its borrowed capital (public debt incurred through deficit spending) then we’re collectively better off by borrowing and spending until returns approach the cost of borrowing. As a rough approximation, Fisher takes GDP and divides by total equity in the country (equity = assets – liabilities); he comes up with roughly a 12% return on equity figure. Comparing this to the cost of debt for the government, which can be stated as the 30-year Treasury rate of less than 5%, it would make sense to continue borrowing and spending!
On the negative side we’re seeing an increasing debt service requirement that’s sapping up a growing portion of our budget. For instance, in 2007 it took 13.4% of the budget to pay interest on the national debt.
The biggest potential losers are the young and yet to be born. Sustained deficit spending is akin to transferring tax liability to future generations. Current citizens benefit from spending beyond their means, while the burden of repayment is shifted to the future.
What do you think?