Why is an increased federal debt with a decreased annual deficit a good thing? We had a surplus before!!?

Question

I really don't want to heard political crap, just why almost thirty thousand dollars per person debt makes sense. This is more then most people owe on credit cards, and a lot of peoples largest IOU (which will not be written off).

Answer 1

You are right. The only explanation I can think of is if you are decreasing your deficit, then you are moving toward a goal of a surplus.

Answer 2

Short answer: It is not good, it is bad.

Federal debt is paid through taxes, slowly and over a long time. It took a long time to get here, and it will take a long time to get back. So no one is going to walk up and demand the $30,000 in cash tomorrow.

Most of the surpluses were PROJECTED surpluses, not real budget surpluses. In other words because of the growing economy, if spending remained the same, we would have had budget surpluses. This did not materialize for a couple of reasons:
1) Bush tax cuts
2) Economic recession (slowing economy)
3) Iraq (still not officially accounted for in the federal budget)
3) Katrina relief (although little of the promised money has actually been spent

Now before the panic wagon comes to pick us all up, the national debt as a percentage of GDP (gross domestic product: or the measuring stick of the whole economy) is still low. The numbers appear astronomical (OK, the ARE astronomical) but as a percentage of our entire economy they are manageable.

The real problem comes, if the percentage becomes larger then all of the borrowing that the government has to do will "crowd out" businesses and people from borrowing, making the interest rates higher and slowing the economy. This would be super bad, and the FED Chairman Ben Bernanke is already warning that it might be coming if we don't get control of our spending.

Answer 3

OK one, the Robert Rubin surplus resulted from refinancing the existing federal debt, most of which was in long bonds, at then-lower short-term rates. This is not available anymore.

Two, let's not fall into the trap of saying "our children and grandchildren will have to pay off this $8TN debt...." Your electric utility is likely leveraged at least 2-1. It will likely have at least as much debt and a similar debt-to-EBITDA ratio 30 years from now.

HOWEVER, you're right, we can't keep this pace up forever and there is no excuse for the present deficit - both Bush AND Congress, both parties, have been SPENDTHRIFTS.

That said, TAX POLICY should be considered exonerated. Tax REVENUE has in fact skyrocketed since the tax cuts were passed, and most of the revenue increase has occurred while the Fed has been RAISING interest rates, meaning there's really no intervening factor that could explain the revenue increase - the private sector's reinvestment of the initial tax savings augmented the tax base, thus producing higher tax revenue, just like the supply siders said would happen. You really have to want to not believe this to argue that it isn't true, and the arguments against this, particularly Krugman's, curiously change every year. In '04 he dismissed the growing Treasury receipts as a temporary lift that would reverse itself, but the revenue growth rate keeps improving...

You also have to consider the long-term implications of growth and a 4.4% unemployment rate - more people working means more people paying into social security and less of a need for jobless programs. So even if we were to tilt to the other side of the Laffer Curve, it should be OK since the "need" for welfare programs should go down (as it is, it's up only because we choose to spend welfare dollars on illegal immigrants - not saying this is good or bad to support foreign poor people, just pointing out that the increase in poverty is 100% imported).

Bottom line, if we cut non-entitlement spending growth to CPI and keep tax rates where they are today, we'd soon have a surplus and then start being able to pay down the debt. Barring another terrorist attack, war or natural disaster we would probably be OK trying to grow into the existing debt - another 10-15 years of 2.5% or better GDP growth with no debt growth and our economy really wouldn't be considered leveraged - but I wouldn't want to take that risk.