What a deal!
In late October, leaders of Congress and President Obama reached an agreement on the federal budget for the next two years. Some policymakers say the deal does nothing to end the “crazy” deficit spending, but maybe deficits aren’t the problem.
According to the U.S. Treasury, our federal deficit for the current fiscal year stands at $530 billion, or about 3 percent of the country’s annual income as measured by gross domestic product. Despite an economy now 80 percent bigger, the federal government hasn’t run a budget surplus in more than 10 years, and total federal borrowing held by the public is now more than $13 trillion.
Many critics of the deal would like to see Washington balance its budget, just as households and the state of Idaho must do. The subject is open to debate.
Proponents of a balanced federal budget generally argue that budget deficits impose a burden on future generations, by raising taxes higher than they would be otherwise, and the resulting higher debt crowds out private investment.
Opponents of a balanced budget requirement argue that a government deficit does not preclude private investment and that the problems caused by the government debt are overstated. The current 3 percent of GDP deficit is much lower than the borrowing level of many households.
So the debate continues, and both sides have some reasonable arguments. But maybe we are asking the wrong question.
Let’s ask, “How big of a government do we want?”
The answer to this question better determines the need to raise taxes now or in the future. If we choose a larger government now — with “investments” in education, health care or myriad other proposals — a limit to borrowing from the public will eventually arise.
If we choose a smaller role for the government, the current debt will be paid in the same manner households eventually pay all their debts — with higher future incomes. The growing U.S. economy will simply have more private investment rather than public investment.
The deficit is not the issue. It’s a question of who you want making the investments in our future.
Peter Crabb is professor of finance and economics at Northwest Nazarene University in Nampa. email@example.com. This column appears in the Nov.18-Dec. 15, 2015, edition of the Statesman’s Business Insider magazine.