Do deficits matter to the U.S. Economy?

Do deficits matter and will they harm the U.S. Economy in the long term?

It was widely reported in the past that former Vice President Dick Cheney said that deficits do not matter.    In general, the dollar amount and the number of years they keep happening will dictate how much they matter and the impact on the U.S. Economy.    

Saying they do not matter is only correct when they are very small, and for only one or two years.

That has not been the case for decades.

Large deficits for many years matter a great deal.   Currently, the government is using approximately 10% of revenues to simply pay interest on the current national debt.     This means that only 90% of the funds taken in can be spent.   Each additional year the Government runs a large deficit, that 90% goes down. Most State laws require the State to balance the budget every year.

So deficits do matter.  Based on federal budgets since 1980, a balanced budget amendment is the only solution to the problem that will work in practice. All of the other options are debated but they do not work because they are aspirational and later forgotten and ignored.

The notion that a stimulus will create enough revenues to repay the borrowed money has not happened. In fact, in the rare cases when there was a surplus, the government quickly legislated a massive tax cut, again largely responsible for immediate deficits.

Large shortfalls in revenue compared to spending over time creates a debt that eventually begins to starve available cash.

The borrower at some point has to make a fundamental decision that will make or break their long term financial future.

Stop borrowing and have a sustainable future or borrow into bankruptcy. The government’s share of interest on debt becomes so large they must borrow more to spend the same amount of money on programs. International and domestic lenders become alarmed at the ability of the borrower to repay and require higher rates of return. This exasperates the debt and need for more money. The debt then increases faster.

Eventually, there need to be large tax increases or large spending increases. This comes at a very bad time in which Social Security and Medicare shortfalls will also have to be corrected. Those shortfalls haven’t even been taken into account yet and have been ignored for a future crisis.