Easy Lesson in Federal Budgets
The chief difficulty with understanding federal budget deficits and surpluses is the political hype that comes with them. Another difficulty is that they don't occur in a vacuum; they're part of the whole economic picture.
But it's really pretty simple.
One more note, in case anyone wonders: the federal deficit measures the excess of government spending over its revenues for one year; for example the federal budget deficit for Fiscal Year 2006 was around $250 billion. A debt is the total of all deficits; for example, the total national debt is $8.837 trillion.
Let's look at the record. Since 1929 the US budget has been in surplus only twelve times: four during theTruman presidency, three under Eisenhower, once under Johnson, and four under Clinton--in other words more often when a Democrat was president. The biggest deficits since World War II have been realized during the administrations of Republicans: Eisenhower, Nixon, Reagan, and the two Bushes.
Yet fiscal responsibility and balanced budgets have long been a staple of Republican political philosophy, and Democratic presidents are constantly under attack for presumably being fiscally irresponsible. The facts show exactly the opposite. The trouble is a lack of understanding of how the economy works.
A modern monetary economy requires some debt creation somewhere to finance new investment, because spending all of the income realized in a year is necessary to clear the market of what has been produced during that year. Debt formation may occur in the business sector, in the consumer sector, or in government. If business does not finance investment sufficiently, and consumers can't afford to (consumer debt is at a rather scary level now), it is left to the federal government to see that it happens or the economy will go into recession. Thus most of the time some government deficit financing is needed. If it is not forthcoming, the resulting recession will send the budget into deficit anyway. Thus is explained the budget deficits that regularly occur during Republican presidencies. In their efforts to balance the budget they siphon purchasing power out of the economy and cause recessions and therefore deficits.
Democratic candidates, correctly anticipating attacks, are fearful of allowing a deficit. The fiscally responsible policy, however, would be to allow a deficit if needed to keep the economy going at full employment. It would indeed be instructive to compare Clinton's fiscal policies with those of George W. Bush: Clinton shifted the tax structure upward by increasing taxes in the top brackets and restoring the Earned Income Tax Credit for the lowest brackets. Bush shifted taxes downward by cutting taxes for the rich and trying to balance the budget on the backs of the poor by cutting social services. The result? Clinton stimulated the economy and realized budget surpluses. Bush has achieved nothing but budget deficits.
The problem is in explaining this in this age of ferocious and mendacious attacks from the right.
But it's really pretty simple.
One more note, in case anyone wonders: the federal deficit measures the excess of government spending over its revenues for one year; for example the federal budget deficit for Fiscal Year 2006 was around $250 billion. A debt is the total of all deficits; for example, the total national debt is $8.837 trillion.
Let's look at the record. Since 1929 the US budget has been in surplus only twelve times: four during theTruman presidency, three under Eisenhower, once under Johnson, and four under Clinton--in other words more often when a Democrat was president. The biggest deficits since World War II have been realized during the administrations of Republicans: Eisenhower, Nixon, Reagan, and the two Bushes.
Yet fiscal responsibility and balanced budgets have long been a staple of Republican political philosophy, and Democratic presidents are constantly under attack for presumably being fiscally irresponsible. The facts show exactly the opposite. The trouble is a lack of understanding of how the economy works.
A modern monetary economy requires some debt creation somewhere to finance new investment, because spending all of the income realized in a year is necessary to clear the market of what has been produced during that year. Debt formation may occur in the business sector, in the consumer sector, or in government. If business does not finance investment sufficiently, and consumers can't afford to (consumer debt is at a rather scary level now), it is left to the federal government to see that it happens or the economy will go into recession. Thus most of the time some government deficit financing is needed. If it is not forthcoming, the resulting recession will send the budget into deficit anyway. Thus is explained the budget deficits that regularly occur during Republican presidencies. In their efforts to balance the budget they siphon purchasing power out of the economy and cause recessions and therefore deficits.
Democratic candidates, correctly anticipating attacks, are fearful of allowing a deficit. The fiscally responsible policy, however, would be to allow a deficit if needed to keep the economy going at full employment. It would indeed be instructive to compare Clinton's fiscal policies with those of George W. Bush: Clinton shifted the tax structure upward by increasing taxes in the top brackets and restoring the Earned Income Tax Credit for the lowest brackets. Bush shifted taxes downward by cutting taxes for the rich and trying to balance the budget on the backs of the poor by cutting social services. The result? Clinton stimulated the economy and realized budget surpluses. Bush has achieved nothing but budget deficits.
The problem is in explaining this in this age of ferocious and mendacious attacks from the right.
posted by Gladys at 3:09 PM
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