Debt & Deficits

Economic Consensus: “debt does not avoid hard choices. It only delays them” N. Gregory Mankiw , NYTs March 26, 2011

This is a strange subject to cover because economists have warned policymakers for decades that incurring large federal deficits year after year is “unsustainable”. Yet, our currency has not been debased, nor has private sector investment been severely ‘crowded out’ or economic growth severely inhibited as predicted, and the U.S. federal government—even after adding ~$3 trillion to the debt in 2020– can still borrow at around 1 percent per year. Our collective common sense knows this cannot continue forever but prophecies about the timing of the inevitable reckoning have been way off.

Despite all indications to date of U.S. deficits providing a free lunch, the public policy debate is not about whether to change policy. There is consensus in economics that a) we must do something, and b) whatever we do, the policy adjustments must support economic growth. There’s the rub: addressing the debt while supporting growth requires some combination of the following: 1) higher taxes to reduce debt, 2) higher taxes to pay for more government investment , 3) less government spending, 4) selected tax reductions, and 5) some inflation to pay down existing debt with devalued dollars. However, any of these these medicines can slow economic growth if not properly implemented. The economic policy debate is about which combination will promote economic growth and reduce the relative debt burden on future generations.

This topic has 3 sections:

1. Debt & Deficit Basic (Primer part 1), covering the basic concepts and definitions about the federal debt and deficits.
2. How Economists Measure the Risks of Continuing Down the Current Borrow-Spend Path (Primer Part 2)
3. The Policy Debate: What Policies Will Reduce the Debt Burden and Not Inhibit Long Run Economic Growth?