Deficits and Debt Do Matter

Keynesian economics encourages deficit spending by government to address the problems of a recession. So we get (after the massive bank, insurance, and auto manufacturer bailouts), the big “stimulus” plan, which has accomplished some political rewards for favored interests, and several large but not particularly useful pork projects (Murtha’s airport, for instance). What is the reward to the American taxpayer for such spending? In general, not much. Unemployment is at its highest level since 1983 and won’t be coming down much for the next year or so. But Obama is getting action on his cap and trade and Obamacare programs, which together, if finally passed, will greatly increase unemployment as well as the deficit.

Current Conditions
As I write this, the national debt of the United States is $12,020,893,013.17, or an estimated $39,106.98 per person. [1] The federal budget deficit for the fiscal year ended September 30, 2009 was a record $1.42 trillion. “In addition, future deficits are currently projected to total $9.1 trillion in the coming decade.” [2]

The $9.1 trillion figure is overly optimistic, since it assumes low interest rates throughout the period, which appears to be impossible as more massive spending comes on stream.

These deficits alone, in my opinion, make a convincing argument against Obamacare and cap and trade. Not to mention the unemployment rate. But what are the consequences of such spending and debt?

Consequences of Large Deficits
As the national debt increases, the cost of financing it increases, not only because of the greater principal, but also because of the higher interest rates that will be required. Other interest rates must rise in order for other (non-government) debt instruments to remain competitive. Thus, we’ll see higher interest rates in general, which will increase the costs of buying houses and cars, taking out bank loans, etc.

As Roger W. Garrison pointed out, in a 2003 article (when the U.S. faced a deficit of $304 billion), “…At that level of borrowing, the effect of the deficit will be:
• higher interest rates (if the government borrows domestically) OR:
• increased inflation (if the Federal Reserve monetizes the debt) OR:
• weakened export markets (if the government sells debt abroad) OR:
• tax hikes (possibly in the form of a Johnsonesque "surtax") OR:
• all the above in some combination. …” [3]

Of course, each of these things represents a kind of tax on the citizens and reduces purchasing power and the ability to save. None of them tends to encourage higher employment.

He also mentions that deficits introduce a good deal more uncertainty into things, since it is initially unclear how they will be dealt with. [4]

These uncertainties become greater at the much higher spending levels we’re seeing now.

The Way Forward
Douglas Holtz-Eakin (former director of the Congressional Budget Office) at Wall Street Journal reminds us that Barack Obama promised action on big problems and has expended a lot of political capital on health care reform. But the big problem is not health care, but the deficit. “Recently, the White House signaled that it will get serious about reducing the deficit next year—after it locks into place massive new health-care entitlements. This is a recipe for disaster….”

Holtz-Eakin says that despite the claims of Obama and his advisers that they understand the concerns over the deficit, “the administration's policy choices are the equivalent of steering the economy toward an iceberg….” [5]

Here’s the President speaking on the deficit in March 2009:



More spending on Obamacare, climate control, education, etc. will neither promote economic growth nor help with the deficit. Also, he wants to blame the Bush Administration for his troubles. The deficit he inherited was greatly enlarged, more than doubled, by the massive bailouts that he supported.

None of this would surprise Richard Ebeling, who commented as follows for National Review Online symposium, “Obama Money Talk: The New Administration and the Economy” in November 2008:

“In spite of the impression in the media, that President-Elect Obama’s economic team reflects an underlying “pro-market” orientation, they in fact are advocates of manipulating markets to generate outcomes more to their interventionist and welfare redistributive liking… That is not the free market. They will manipulate the markets to bring about the “green” and pro-labor union outcomes that will have nothing to do with the outcomes we as consumers would have desired in a more competitive environment….

“In addition, they are all on board to design and implement a vast deficit spending package that will end up doing far more harm than any good ….” [6]

The solution involves looking at the deficit as an immediate problem, not something to be dealt with only in future years. There will have to be some hard decisions about serious budget cuts, including entitlements, and some revision of the tax structure. The recession and unemployment situation need to be substantially improved before the deficit can be effectively reduced, because until then, revenues will be too low. But this needs to be dealt with in the very near future.

Political difficulty in fixing these problems is preferable to the alternatives: downgrading of America’s credit rating, and possible national bankruptcy. Printing money has its limits. We need to avoid finding out what they are.


[1] U.S. National Debt Clock, 11/30/2009, 9:27 PM CST, at http://www.brillig.com/debt_clock/

[2] David Jackson, “Obama team makes it official: Budget deficit hits record. By a lot.”
USA Today.com, 10/16/2009, at http://content.usatoday.com/communities/theoval/post/2009/10/620000005/1

[3] Roger W. Garrison, “The Trouble with Deficit Finance,” Ludwig von Mises Institute, 02/04/2003, at http://mises.org/daily/1158

[4] Ibid.

[5] Douglas Holtz-Eakin, “The Coming Deficit Disaster,” Wall Street Journal – Opinion Journal, 11/20/2009, at http://online.wsj.com/article/SB10001424052748704888404574547492725871998.html

[6] “Richard Ebeling Comments on the Obama Economic Team for National Review Online,” American Institute for Economic Research, 11/26/2008, at http://www.aier.org/about-aier/news/853-richard-ebeling-comments-on-the-obama-economic-team-for-national-review-online

Photo: Dreamstime.com

PLEASE NOTE: As you may have noticed, the national debt figure above is missing three places. As of December 5,2009, 11:51 PM CST, the debt is $12,096,353,549,537.00. So because of my typo, the amount I stated was roughly one one-thousandth of the correct amount. Sorry I made this error. If the figure I gave were correct, our situation would be a lot better!