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A constitutional amendment has been proposed that would require Congress to balance the budget each year. Is it possible to balance the budget every year? Is it desirable?
"Yes, it is technically possible to have a balanced budget each year. State governments each year demonstrate this case. The more important question is whether this is desirable. Pro (there should be a balanced budget): When debt is out of control, it can undermine the economy and government. If the debt is held externally, incurring obligations to repay debt in the future transfers the costs of our current consumption to future generations. They will find their standard of living lessened by having to repay our loans. Con (there should not be a balanced budget): There is a loss of flexibility in the use of fiscal policy; in fact, fiscal policy will exacerbate swings of the economy, forcing restraint in times of depression and stimulus in boom periods. There is a loss of control through monetary policy, one example of which is put into place through the sale and purchase of government securities. There are fewer choices for savers looking for places to hold their wealth. The government becomes more shortsighted and difficult to manage. It has less ability to plan and to perform in its infrastructure, education, and other long-run functions; the cyclical nature of the economy will be a source of continual surprise that prevents effective planning.
In what ways do future generations benefit from this generation's deficit spending? Cite three examples.
Answers will vary, yet in general the premise is that we will have more public goods and services in the future as a result of present borrowing. Some examples are investments in the infrastructure by the U.S. government (e.g., the highway system, water treatment facilities. and park land), housing for the poor, and aid to developing countries. All these provide future benefits, some of which are as intangible as goodwill.
Can you forecast next year's deficit without knowing how fast GDP will grow?
Because the structural deficit is tied to GDP growth, it is impossible to know the extent of next year's deficit without knowing how fast GDP will grow. By predicting GDP growth we can, however, estimate the future deficit.
Who paid for the Revolutionary War? Did the deficit financing initiated by the Continental Congress pass the cost of the war on to future generations?
Citizens and taxpayers in the new country obviously paid most of the war's costs. There were loans from France and Spain. This is external debt. As long as outsiders are willing to hold U.S. bonds, external financing imposes no real cost. Yet once external debt must be repaid, it must be repaid with real goods and services. This implies a real cost to future generations.
If deficit spending "crowds out" some private investment, could future generations be worse off? If external financing eliminates crowding out, are future generations thereby protected?
Future generations could be worse off if crowding out results in government spending that has less of a positive impact on long-range growth than the private spending it crowds out. External financing will not protect future generations. Eventually a return must be paid unless external groups have an insatiable appetite for American debt.
When are larger deficits desirable?
Large deficits may be desirable in the short run to help avoid or mitigate a recession and its associated job and income losses. Large deficits may also be perceived as somewhat desirable during times of war.
" How long would it take to pay off the national debt? How would the economy be affected?
The answer to this question depends on how much society wants to pay on the national debt each year. Historical evidence suggests that we will never pay off the debt. However, paying off the national debt primarily involves a redistribution of income from taxpayers to bondholders. To the extent that this is an internal transfer of income, the economy will be essentially unaffected by paying off the national debt, although the distribution of income will change. To the smaller extent that bonds are held outside the United States, there will be fewer goods and services available for domestic consumption, ceteris paribus, as foreign holders of debt purchase U.S. goods and services with their new cash. It is, of course, possible that the dollars will not return to the United States but rather will circulate elsewhere in the global economy. In such a case, there will be little or no effect internally due to the repayment of the national debt.
Why are people worried more about federal budget deficits than environmental protection (In the News, page 251)?
There is an opportunity cost to this deficit spending. Increased spending can cause interest rates to rise which contributes to crowding out. The national debt increases when there is deficit spending which causes concerns about refinancing, the cost of the debt service, and the changing mix of the economy's output towards public sector goods.