Do we really have to balance the budget?

Josh Barro argues no, and says we really just need a deficit as a percent of GDP that is half of the GDP growth rate. This would stabilize the debt-to-GDP ratio (cumulative debt) at 50% of GDP in the long run. If long run GDP growth were 4% then, you could run a deficit of around 2% of GDP in perpetuity. Doing so would allow the government to finance things that would otherwise not be provided, like health care for my grandmother, a large Military, infrastructure, etc.

I follow the argument, and actually don’t disagree. However, the reality is that for much of the past 50 years the deficit has been larger than the 2% figure he notes. The deficit has been very large the last two years due to the severe economic downturn (~10% GDP), but was consistently larger than this for the entire last decade (2000s), and most of the 1970s-1980s. It was lower or balanced for the last half of the 1990s.

It will take quite a lot of work (taxes will have to go up and spending down over current projections) for us to get the deficit to 2% of GDP from where we are today. Once we get there we can then decide whether to try for long range balance or not.

update: This economix post by Simon Johnson provides useful context and history of the budget deficit across U.S. history.

 

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

3 Responses to Do we really have to balance the budget?

  1. Kenneth Almquist says:

    Barro is correct that small deficits are not a problem as far as the economics are concerned. The argument for preferring a balanced budget to a small deficit is is that the former is supposed to be more political sustainable. Your average voter can understand what a balanced budget is. The difference between a $100 billion deficit and a $500 billion deficit is much harder to explain, because both numbers are inconceivably large to most people.

    The problem, of course, is that a policy of balancing the budget has not proved politically sustainable. The balanced budget was history the moment the Republicans won the 2000 election, and I don’t forsee us getting another balanced budget for decades. Who wants to go through the painful work of getting the budget into balance again, only to have all that work swept away the next time the Republicans win an election?

  2. Scott from Ohio says:

    Barro is right that economically we don’t need to strictly balance the budget. But even a deficit at 2% of GDP would be less than $300 billion. That’s nowhere near enough to pay for health care for your grandmother, a large military or infrastructure, let alone all three. (At least, assuming that other people’s grandmothers also get health care.) If we want to guarantee long-term funding for any of those things, we shouldn’t count on deficit spending to do it.

    Plus, we need to recognize that the deficit is always going to be much larger during and after recessions. If we want a long-run debt-to-GDP ratio of 50%, the deficit during good times will need to be much lower than half of GDP growth. We might be able to sustain an extra $100 billion or so per year, but don’t count on much more.

  3. Don Taylor says:

    @Scott from Ohio
    Obviously a ~$300 B deficit wouldn’t pay totally for any of those things as you note (Medicare over $500 B alone this year; will be over $1 T in 2021). The point is that running a deficit allows the financing of more of something than is possible with a balanced budget. Good point about if goal is stabilize at 50% GDP long run would need smaller in good times to allow for much larger in bad.

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