Understanding The Deficit
By Ryan Walsh (02/01/05)
Let’s pretend that you know a guy who considers himself to be hopelessly mired in financial debt. The sad part is, regardless of the amount of money he owes, he seems to plummet deeper and deeper into the red every year. Undoubtedly, your friend’s hopeless situation begins to worry you.
Now let’s pretend that one day, his depression and despair compel him to call you for encouragement. After you sympathetically listen, taking note of his dire circumstances, he eagerly changes the subject to something more uplifting. He starts telling you about his investment firm’s recent success, which has enabled him to boost his yearly income by tens of thousands of dollars. Of course, this new information sheds light on ever-salient fact: the seemingly overwhelming amount of money he owes pales in comparison to the amount of money he makes. You explain this to him, but he stubbornly refuses to admit that the burden of his debt has lessened.
You hang up and rightly conclude that your friend is beyond naïve: he’s insane.
Pointing to recent Congressional Budget Office (CBO) numbers as proof, Democrats and their ideological brethren in the media are raging mad about the state of the federal deficit. “It keeps increasing!” they say.
Yet their economic reasoning is, like the man in the story, utterly insane. Here’s why.
While the deficit has grown, the economy has grown faster, which is why economists say that the deficit has actually decreased. In fact, the government’s “debt ratio,” which sets currently held federal debt against the backdrop of total national income or GDP, is well below the post-World War II historic average. (The average is 48 percent, while today’s ratio is 38 percent.)
That’s because the economy, stimulated by important tax cuts in 2003, continues to deliver even more revenue to the federal government. “At this rate,” writes economist Larry Kudlow, “the 2005 deficit is on track to drop to $355 billion from $413 billion in fiscal year 2004. As a fraction of projected gross domestic product, the new-year deficit will descend to 2.9 percent compared with last year’s deficit share of 3.6 percent.”
Still, some worry that any sort of substantial deficit will send interest rates through the roof, enervating prospects of private sector growth. According to this reputable theory, as the government increases its borrowing, it increases the total demand for borrowed money. This means that the price of borrowing (interest rates) must also rise. But the reality is that in the vast global economy of the 21st century, people can look beyond American borders for money. In other words, the deficit would have to be exorbitantly high in order to put pressure on the supply of money the international market offers.
The non-theoretical, very real problem with a deficit is the amount of revenue that’s required to finance it, or to pay off interest. So it’s not that conservatives in general are blissfully apathetic about deficits. Nevertheless, there still remains a fundamental difference between the way a conservative and a liberal perceive the deficit. While a liberal might see the deficit as a problem, a conservative sees it as a symptom of a problem, namely overspending.
Since long-term data prove that tax cuts lessen the severity of a deficit, one can only point to out-of-control spending as the real problem.
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