Widgets Magazine


Super Tuesday: The federal budget deficit

James Stephens


Debate over government deficits dominated politics in the 2012 presidential and congressional elections, yet it seems as though candidates have largely been avoiding the topic in 2015-16. Republican candidates are shying away from the federal budget deficit because they know their tax plans will likely add to it. The American people are no longer finding the deficit to be a salient issue anymore. So why consider the deficit now? While it is true that the debt has decreased significantly, I am wary of determining the deficit a non-issue simply due to the consistency of a Google query.

To reply to my opponent’s first point, the U.S. has lost credibility with international creditors. Since 2011, the U.S. has had a downgraded international credit rating that has not returned to Triple-A status. Secondly, the comparison to Greece appears to be a strawman argument — a premise put forward that is easily defeatable to build up one side’s argument. Greece is a part of a heavily integrated intergovernmental economic system, with a GDP that ranks 45th out of countries listed by the World Bank in 2014. In comparison, though not particularly comparable, the U.S. is ranked first. Also, in 2014, the Greeks suffered an unemployment rate 20 percent higher than the U.S., according to the CIA World Factbook. The U.S. also has a population 30 times larger than Greece. I secured a grant to study ancient ruins in Greece this past summer, and beyond an affinity for olives, a U.S.-Greece comparison is not fruitful.

The main danger is that deficits can slow economic growth. Private saving can be used to pay for private investments or to cover federal deficits; it cannot be used for both simultaneously. When the government increases its borrowing, it makes it harder for companies and individuals to finance new investments (a crowding-out effect). Without those new investments, businesses cannot expand as quickly as market conditions would support or provide workers with improved physical capital, like faster computers (which I need), to boost their productivity. Higher deficits in one year do not hurt productivity much. But higher deficits over a long period of time will have a real impact.

Worrying about the long-term effects of the deficit is not counterproductive. Are we on a downward trend? Absolutely. But make no mistake, we must look at the long term. The current debt-GDP ratio is higher than any other time in U.S. history (except for World War II). A study by the International Monetary Fund suggests that, for each additional 10 percent in the debt-GDP ratio, growth in subsequent years falls by 0.15 percent. The Congressional Budget Office has estimated that increasing deficits by $2 trillion over the next 10 years (that is, by just under 1 percent of GDP) would decrease GDP by 7.5 percent over 25 years. Both of these estimates suggest substantial impacts on long-term economic growth.

Continual borrowing is not the only piece to a viable long-term strategy, and selling long-term assets to finance current consumption undermines future production. Is a federal budget deficit necessary? Yes, there are several benefits to participating in international credit, especially, as my opponent points out, with such a low interest rate. We should not sit back and say there is nothing wrong with borrowing to finance current consumption, but instead look to cut some of the 2,300 subsidy programs the federal government manages, reform the tax code and borrow for the purpose of financing long-term investments.

Contact James Stephens at james214 ‘at’ stanford.edu.

Cory Herro


Americans make a big deal out of U.S. debt. When Donald Trump, who will never be president, writes in The Wall Street Journal that “China owns $1.4 trillion of our debt,” people react fearfully; China must be “winning.” At least since I was in middle school, I’ve heard politicians — mostly conservative ones — warn of the U.S. becoming bankrupt like Greece. Even the Google query “Is the U.S. going to end up like” yields the autofill “Greece.”

Greece and China should not be the bogeymen of the debt debate. Rather, Greece and China illustrate why we shouldn’t worry about our debt. Consider three statements I defend in this article: 1) It’s good that people around the world, including Chinese creditors, own our debt; 2) The U.S. will never, ever become like Greece; and ultimately, 3) Debt is good.

People argue that if we keep running up our debt, we will lose credibility with our creditors, who may demand higher interest rates or stop holding our debt. This has been the warning for about a decade now, but the interest rate on U.S. debt has stayed low: a mere 1.6 percent. This low rate means that the U.S. dollar is still valuable to people all around the world. Compare this interest rate to that of Greek bonds in 2012 — a record 48 percent — and you’ll see that the U.S. is at little risk of becoming Greece.

Why have interest rates on U.S. debt stayed so low? Relative to Trump’s point, why would China possibly want to own $1.4 trillion of our debt at such a low interest rate?

The answer is that the U.S. dollar is the globe’s reserve currency, meaning that it is the most popular foreign currency held by central banks. Imagine gathering all the foreign-exchange reserves from all the big banks around the globe — trillions of dollars in gold, U.S. dollars, Chinese yuan and so on. You’d have all the bank reserves used to back almost all money on Earth, and you’d find that two-thirds of this money is in U.S. dollars. The market, so to speak, for U.S. dollars includes well over a trillion individuals.

The dollar’s reserve-currency status gives the U.S. government wiggle room to print a lot of money. (That our government can print infinite money further differentiates us from Greece.) Fears of hyperinflation to the tune of Zimbabwe circa 2009 or post-WWI Germany are thus unwarranted.

But what if banks around the world switch away from the dollar? Some commentators predict that this could happen, but it seems unlikely. Everyone uses the dollar for international transactions, creating a “network effect” that’s unlikely to change anytime soon. To quote Forbes contributor Pascal-Emmanuel Gobry, “Everyone uses the dollar as the reserve currency because everyone else uses it, creating a self-reinforcing cycle that’s extremely hard to break.”

Although the U.S. can keep borrowing without fear of default, does that mean it should? I mean, surely we cannot run a deficit forever.

Most economists agree that having a certain amount of public debt is good for the economy. This is why almost every government around the world has debt, why the British government has been in debt for more than three centuries. As New York Times columnist Paul Krugman explains, “Issuing debt is a way to pay for useful things, and we should do more of that when the price is right.” Today, the U.S. can borrow money at historically low interest rates, he continues, “so this is a very good time to be borrowing and investing in the future.”

As my opponent notes, the federal government manages 2,300 subsidy programs. Many of these programs are good investments, and many are bad ones. One of the keys to budget policy is to treat government spending as investments. So budget slashing is justified when the government is making bad investments — investments that won’t save money or improve the health of the economy. Cutting government spending is not always prudent, because many government programs actually save money in the long run. 

Long story short: “Debt is bad” is not a sufficient justification for slashing the budget. Ironically enough, if the U.S. cuts spending too aggressively to “avoid becoming Greece,” our economic output would contract, like Greece in the wake of its own austerity measures.

Contact Cory Herro at cherro ‘at’ stanford.edu.