Deficits Are Not Always Bad, But They Always Matter

Fri, 05 Jun 2009 12:52:32 +0000

Pete's post on "Deficits Matter" discusses the impact they may have on future interest rates if debt becomes high relative to GDP. I contend that even if deficits never had an adverse impact on interest rates, they are still critically important as a matter of policy. Even if they don't matter for efficiency, they always matter for equity. The debt one generation of taxpayers runs up must be serviced or repaid by a subsequent generation.

There have been times in our history -- typically post-war periods -- where one generation has issued the debt and then quickly repaid it. In those cases the deficits were completely appropriate. But what countenances the increase in debt over the last decade? If we want to issue debt to overcome our problems in the financial and housing markets, that is fine as long as we intend to pay it back quickly. But it's clear that we don't -- the Obama administration has announced a target of reducing these bloated deficits in half in five years. That means that we are running these deficits even as the economy is projected to be growing again. That's just as pathetic, but on a much larger scale, than the budget target we had under the Bush administration. And, of course, long-term entitlement programs like Social Security and Medicare, where promising ourselves benefits at the expense of future workers and taxpayers is an embedded design feature, carry even larger burdens for future generations.

On Monday, the Rockefeller Center hosted a panel with the title, "Debtor Nation: The Threat to America's Future." I was one of the panelists, along with my colleague Jonathan Skinner and Jim Poterba of MIT. Here's a write-up in the campus paper, and the video will be posted shortly to this YouTube channel.