I've been seeing a lot of writing lately which champions the Bush Administration's success in bringing down the deficit level this year. Let's be clear: A lower deficit is a good thing, but just because the deficit has been lower in recent years doesn't mean that we have been successful in addressing the long-term fiscal challenge posed by the impending retirement of the baby boom generation. The costs of Social Security and Medicare are about to explode, and Washington is just sitting back waiting for it to happen.
Hale "Bonddad" Steward wrote a blog entry yesterday on The Huffington Post that, while politically one-sided, nonetheless lays out a strong economic case for why doing more to bring down our nation's debt is incredibly important (http://www.huffingtonpost.com/hale-stewart/why-clintons-economy-was_b_59...)...
Clinton's economic team of Robert Rubin, Lloyd Bentson (RIP), Leon Panetta and Alice Rivlin were all deficit hawks. All continually argued for a balanced budget. ;They won. Clinton came to realize the importance of balanced budgets.
But, why is a balanced federal budget so important?
It prevents crowding out. This is a fancy way of saying money that would finance the federal budget deficit is instead invested in private capital. Let me use the current situation as an example. According to the Bureau of Pupblic Debt the US has issued over $550 billion in net new debt per year for the last 4 years.. That means a little over $2 billion dollars was not invested in the private economy, but instead invested in US government bonds. The larger the deficit, the less money available for private investment.
Psychology and uncertainty. A budget deficit detracts from individual's confidence in the market and the overall economy. As individual's look to the federal deficit, they understand that at some time the government must pay back the money it borrows. That means the government will probably have to either raise taxes (more likely) or decrease spending (far less likely whichever party is in control of the government). ;Deficits create psychological uncertainty. The larger and more persistent the deficit, the less happy people are and the less prone they are to take economic risks.
Let's coordinate three sets of data to illustrate the point. According to the Congressional Budget Office, the deficits/surpluses for years 1993-2000 were (respectively and in billions) $-255, -$203, -$164, -$21, +$69, +$125, +$236, +$128. So, the budget deficit continually decreased from 1993-1996, the budget surplus increased from 97-99 and the budget showed a surplus in 2000 although this was lower than the preceding year. In other words, the record indicates a clear path towards balancing the federal budget. This was not the result of a happy accident it was deliberate.
One of the prime reasons why the 1990s economy was so successful is the incredible amount of confidence this gave private investors. They could look at Washington with confidence, knowing politicians managed national finances were maturity. There was no talk to the deficit - was it too high, could it be maintained at current levels, will they ever get around to fixing it etc..... Simply put, investors had a sense of certainty and confidence about the economy. This encouraged them to take risks which helped everybody.
It's a strong argument. Don't let anyone tell you that deficits don't matter.
