An Economics Lesson on Deficit, Debt


Republicans in the House of Representatives recently caved and allowed a simple vote on raising the debt limit of the United States. Their hand-wringing about the debt is disingenuous, but more importantly, it is part of a campaign to confuse America’s workers about the real deficit, which must be addressed urgently: the deficit in jobs, which according to the non-partisan Congressional Budget Office cost the economy about $730 billion in lost production.

The CBO has projected that the federal budget will have a deficit of $514 billion. The agency projects that next year the budget deficit will be $478 billion. These are large numbers, but in economics it is always useful to put numbers in a broader context. In the case of deficits, it is useful to compare them to the size of the economy—just as a $200 bet in a March Madness office pool looks different if you are Microsoft founder Bill Gates or an undergraduate intern in the office. As a share of the Gross Domestic Product—the value of all of the goods and services produced in the United States—the deficit this year will be about 3.0 percent of GDP, falling to 2.6 percent next year. Between 1974 and 2009, the average deficit was 2.7 percent, so these numbers are not out of the ordinary.

Since taking office, President Barack Obama has overseen annual drops in the budget deficit from 9.8 percent of GDP. He also has overseen steady declines in federal outlays from 24.4 percent of GDP to 20.5 percent this year—the largest four-year decline in federal outlays in more than 35 years.

The political stunts around the national debt—the cumulative deficits over the years—have understandably confused many Americans. They hear the national debt is going up and interpret that to mean deficits and federal spending are also growing. Some are so confused, they do not understand that under President Bill Clinton the national debt fell from 47.8 percent of GDP in 1993 to 31.4 percent when he left office in 2001. Republicans in Congress, along with President Bush, then tilted annual budgets from surplus to deficit and increased the national debt. It is disingenuous for the GOP to act as if they were conservative on debt issues.

Because the national debt is the sum of all past deficits, for it to fall, the government once again would have to run surpluses; that is, take in more revenue than it spends. With the labor market still nearly 1 million payroll positions short of January’s 2008 labor demand, it would hurt the economy if the government took money out of the economy by taking in more in taxes than it put back into the economy by spending.

Some people are convinced that smart economics has to be counterintuitive. They are convinced that lowering government spending which would have hired workers to build roads, teach our children, repair sewer systems and build bridges and levees will free up people, supplies and resources that the private sector would hire and buy in more effective ways. When more than 10.2 million Americans report they are out looking for jobs they can’t find, it does not make sense that the government would be diverting workers from private-sector jobs to get our children’s classrooms back to normal size or repair the many potholes in our roads. In December, there were 2.59 unemployed people looking for work for each job opening. Economics is more like common sense—if we want to get unemployment down, it means we must have more job openings than the private sector is currently producing. And those job openings can only come if the public sector demands more, not less.

During the last quarter of 2013, when the Republican House forced a shutdown of the government over the debt, government purchases fell at a rate of 4.9 percent, hurting the growth of the economy. The drop in government contracting and buying lowered the growth rate of the GDP by nearly one point, from what would have been 4.1 percent to 3.2 percent.

Maybe House Republicans have learned their lesson. The American people thought Republicans were fighting against America’s economy by shutting down the government to make political gains. Hopefully, the American people will use this week’s economic news to see why the debate in Washington must change.

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An Economics Lesson on Deficit, Debt

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