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Question:


Are deficits good or bad for the U.S. economy?
-JasonWest


Answer:


Think about your own finances, then add a lot of zeroes, and you’ll have a good idea. The deficit run by the federal government is no different in many respects from the deficit that you would run if you spent more money than you took in. If you had such a shortfall, you would borrow to make both sides of the ledger match up, and the government does the same thing. In your case it would take a bank loan or credit cards to accomplish the task, while the powers that be in Washington sell bonds, but the end result is essentially the same.
 
As to whether this borrowing is good or bad, it depends on what the money is used for. No matter who the borrower is, there are two types of debt: One is taken on as an investment that will generate wealth down the road, and the other is used for consumption. The first type might be considered good debt because it produces a benefit that outweighs the cost of borrowing. An example in your own life might be a mortgage, which let’s you buy a home that will grow in value over the long run, and in the meantime you build equity and live in it. Similarly, the government borrows to invest in roads, power lines and other infrastructure that serve as a backbone for the economy and help to produce long-term wealth.
 
The second type of debt can be more trouble than it’s worth because whatever is acquired with it is often gone a lot sooner than the obligation to pay for it. That could apply to a restaurant meal or television that you charge to a credit card, and while extending the discussion to government finances risks verging onto the treacherous terrain of politics, some would argue that there are government programs for which there is little to show for the money that’s put into them.
 
Regardless of the social value of some of these programs, some economists warn that Washington is producing deficits that are too large, relative to the nation’s economic growth, to be sustainable and that, in fact, the cost of paying the interest on the national debt, which has expanded as a result of the persistently high deficits, is rising high enough to limit the economy’s growth prospects. That risks creating a vicious circle, they say, and if interest rates start rising the circle could become all the more vicious.
-Conrad de Aenlle



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