For my liberal friends, from my favorite demand-side economist, the late Robert Eisner (a so-called Keynesian):
Almost everybody talks about budget deficits. Almost everybody seems in principle to be against them. And almost no one, literally, knows what he is talking about. [The Misunderstood Economy, p.90]
For my conservative friends, from my favorite supply-side economics advocate, George Gilder:
In an economy with an overweening public sector, deficit spending, even in substantial amounts, is decidedly preferable to tax increases. [Wealth & Poverty, p.239]
There. I just wanted you to know that this article is nonpartisan. Now let’s get started.
Why do I spend so much time in this blog talking about debt and deficits? Because ECONOMIC GROWTH is overwhelmingly important in economics. Economic growth, which means “escape from poverty,” is not only the best way to mitigate any given debt burden, it can also be a direct result of borrowing money to finance good investments. (For example, national security—“destruction prevention”—is a good investment, and as every experienced capitalist knows, borrowing money to help fund good investments is perfectly sound financial practice.)
The financial benefits of economic growth will exactly offset the financial costs of debt growth, if both the economy and the debt are growing at exactly the same rate. Robert Eisner, in fact, suggested defining a “balanced budget” as the level of deficit spending which would result in no increase and no decrease in the ratio of debt-to-GDP.
But don’t expect to hear any of that from our mainstream media friends. “Economic growth” gets near-zero air time, compared to scary words like “debt” and “deficit.” Reason: Fear sells newspapers, attracts talk-radio listeners, rivets cable-TV viewers, and gets more hits for political blogs. Conversely, the term “economic growth” makes people’s eyes glaze over (...trust me, I’ve watched it happen many, many times).
Is it any wonder why politicians, journalists, and ideologues continue to scare us with headlines about “debt” and “deficits”? No, it’s not a surprise. Are you content to accept the fear-premise those headlines are trying to lay on you, and therefore the prescribed “remedies” (such as, “elect my guy,” or “support my tax increase plan”)? I hope not; that’s why I decided to post this article about fiscal deficit concepts.
Chart 1, above, depicts the “General Fund” portion of our fiscal budget. I chose to show it in perpetual-deficit mode—but don’t let that scare you just yet; wait until you’ve seen Chart 4. Anyway, the General Fund deficit is essentially the amount by which the USA’s Total Debt increases.
Chart 2, below, shows how the Trust Fund surpluses or deficits (primarily Social Security) affect the General Fund money flows. The green area shows how today’s Trust Fund surplus helps to fund part of the deficit in the General Fund. The net effect is the so-called Unified Budget Deficit, and that essentially is the amount by which the USA’s “Debt to the Public” increases, as shown in Chart 3.
[Note to skeptics: If you’re wondering whether the Trust Fund should be locked up to make it impervious to “raids” by the greedy, profligate General Fund, please take a moment to read “The Social Security Lockbox Hoax,” then come back to this article.]
Finally, Chart 4 below shows how higher economic growth makes the deficit problem smaller (and likewise the debt problem).
Just as we are seeing today, a growing economy results in growing tax receipts even when tax rates do not increase: 17% of a $12 trillion economy is more tax revenue than 17% of an $11 trillion economy.
Click to enlarge.
What could a sustained level of higher economic growth mean for our kids and grandkids? It could mean that the Unified Budget deficit remains small enough to meet Robert Eisner’s “balanced budget” definition (and mine), as well as achieving George Gilder’s scenario (and mine) for shielding the entrepreneurial, growth-inducing private sector from growth-stifling taxation rates.
Can we pull this off? I’m optimistic about it—but it will require more airtime for the important concept of “economic growth” than our politicians and journalists are giving it today. I’ll keep hammering away at it, though, because our grandkids’ financial well-being may very well depend on a defeat of today’s doomsaying, dogmatic fear-mongers by the optimistic economics of growth and abundance.
Growth defeats poverty; growth overcomes the cost of debt. Growth deserves a bigger place in the debate.
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End note: The image below shows how the concept charts above correlate to the government's official budget documents. Enlarge it only if you're interested in that kind of detail.
