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A Brief Look at the United States Budget Deficit Essay

Although people often discuss the budget deficit with the national or public debt as if they were the same thing, they are distinctly different, but related entities. The budget deficit is the difference between what the United States Government brings in and what it spends in the same fiscal year. The national debt or public debt is the amount the United States Government owes at any particular time (Frequently).

Opinions about the problems deficit spending causes vary. Since the budget deficit is reset at the beginning of each fiscal year it is unlikely that a single year of deficit spending would be a major problem. It is less clear that a long series of years with budget deficits is not harmful. Some economists are concerned that continued deficits might result in a lost of confidence in the economy and might trigger a financial crises. Consequently there is considerable interest in producing a balanced budget up to and including an amendment to the United States Constitution that would demand a balanced budget.

Theoretically it appears simple to reduce the deficit; the United States needs to either decrease spending, increase revenue, or both. However even this is controversial. Increasing taxes is never a popular

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idea, but at the same time citizens do not want a reduction in services that would reduce spending. In fact it is not clear that either action would produce the desired result. Increasing taxes could result in stalling investment and actually result in a reduction in the United States’ income.

Correspondingly, reducing services would reduce government spending, but it is likely it would also result in increased unemployment that would decrease tax income and might necessitate increased spending in the form of unemployment and low income benefits. It is evident that eliminating the deficit budget is not as simple as it might be.

The national debt is rapidly approaching 9 trillion dollars. Approximately 5 trillion dollars of this amount is held by the public, the remaining 4 trillion dollars is held by  intragovernmental holdings. Essentially public holdings are debts held by individuals, corporations, and local, state, and foreign governments. Intragovernmental holdings are securities held by the government in trust funds, revolving funds, and special funds (Frequently).

The question as to whether or not the national debt is a major problem is a controversial one. Opinions vary along a spectrum ranging from the belief that the national debt is not a problem at all to the belief that the national debt is a major concern for the United States. Those people who ally themselves with British economist John Maynard Keynes do not consider a large national debt to be a major problem. Keynes become well-known during the Great Depression of the 1940s.

Keynes based his economic theory on his belief that a “normal” economy was one in which there is a high level of employment and a corresponding spending by consumers. In this situation there is a circular flow of money from producer to consumer, and consumer to producer. As long as everyone in the economy has confidence in this flow of money it continues. However, if consumer confidence declines and people begin to save their money instead of spending it the effect is to cut the income of producers. These companies and people consequently cut back on there production and reduce the number of employees.

Consequently the unemployed and other consumers increase their saving “just in case” they continue to be unemployed or lose their source of income. There is a circularity in the economic scenario as well, but it produces a negative economy. Keynes believed that the central bank should increase the money supply to encourage new development that would require more employees and provide the impetus for the economy to grow. Under this model, a large national debt is not necessary a bad thing as it stimulates the economy. Although this economic model seems to work, at least in the short term, it is based on an artificial construct that has no basis in reality (Keynesian).

Regardless of the opinion one holds about the threat of an increasing national debt it is clear that the debt is growing rapidly. It is also clear that the philosophical difference between the two major political parties about the national debt are no longer so clearly defined. Both the Republicans and the Democrats have become accustomed to an increasing national debt and although they may play lip service to trying to reduce it, their efforts have proved fruitless.

Due to the entangled nature between government spending and growth within the economy it is difficult to imagine that the United States will ever have a balanced budget or pay off the national debt. Although the system does seem to be working, one cannot help but be concerned the events might occur that will stretch consumer and investor confidence to the breaking point and result in a major problem for the United States and other countries in the world.

Works Cited

A Review of Kaynesian Theory.” n.d. 5 May 2007

< http://www.huppi.com/kangaroo/Keynesianism.htm>.

Frequently Asked Questions About the Public Debt.” 27 Feb. 2007. Treasury Direct. 5 May 2007 <http://www.treasurydirect.gov>.

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