Deficit as a percent of GDP - good or bad?

[T Roosevelt]

I keep hearing arguments that yeah, the deficit is bad, but as a percent of GDP, it's no big deal. But I never see anything that supports that view.

To me a larger deficit, regardless of GDP, is a bad thing.

Arguments for and against?

[phantom power]

1. It's plenty large, even as a percentage.

I think another good measure is how much of our taxes are burned paying down existing debt. That percentage is already substantial (20-30%), and it's bad for exactly the same reasons that it's bad for an individual to have large credit-card debt. It reduces buying power, since so much money is spent just paying down the principle and interest.

[EmperorHasNoClothes]

2. We should expect deficits some years

The problem comes when you run a deficit every single year for decades in a row (with a few happy, rosy Clinton years being the exception). As the debt climbs, the percentage of our taxes that go towards paying interest on the debt increases.

Currently, something like 20% of our taxes go towards paying off the debt (imagine having the debt paid off and getting an instant 20% tax cut). That is why I think the debt is the real issue, not the deficit.

[shoelace414]

3. It's a way to confuse the issue

so people don't care about it.

[veteran_for_peace]

4. Why Deficits are bad

In theory, deficits hurt the economy by forcing the government to sell Treasury bonds to borrow. As borrowing grows, the government must pay ever-higher interest rates to lure bond buyers. Higher rates ripple through the economy, raising borrowing costs for businesses and consumers. In addition, as investors pour money into Treasuries, they have less to put into stock and corporate bonds, reducing the flow of capital that businesses need to grow. As bond yields rise, money shifts from stocks to bonds, causing stock prices to flatten or fall. Economic growth is stifled.

As bond traders sense this process beginning, they anticipate a future rise in interest rates by bidding rates up in the present. Older bonds with lower yields cannot compete with new bonds, so bond prices fall.

In the early 1980s, heavy military spending and tax cuts under President Reagan began to drive deficits upward. By 1992, the deficit stood at a relatively high level of about 5% of gross domestic product, and the 10-year Treasury yielded more than 7%. Tax increases under the first President Bush and President Clinton, coupled with spending cuts and rising tax revenues from the stock market boom, caused deficits to shrink in the mid-1990s, and the government enjoyed surpluses from 1998 through 2001. Ten-year Treasury yields fell to just over 4% in 1998.


Since 2001, spending increases, tax cuts and smaller tax revenues due to the weak economy and the bear market have caused deficits to mushroom. This year the deficit will likely match the early ‘90s level of 5% of GDP.

[DakotaDemocrat]

5. So do you think...

...the bank will buy this argument when I go in there to talk about my debt situation? "Well, sir, if you take all the gas, slurpees, chips, smokes and magazines purchased in this city and then take my debt into account, it really isn't all that bad..."

I think not...

[seasat]

6. I think a more important term is % growth in the deficit

relative to % growth in GDP. It represents the ability to grow out of the debt. You also have to consider growth in the deficit due to interest accrued. What Shrub Inc people are saying is that the deficit as a percent of GDP is lower than it has been at times in the past. The problem is that there are continuous deficits with no hope of reduction. While a one time hit of 4% of GDP is bad but continuous years of 2.5% of GDP is worse, especially when you include the added interest.

[On the Road]

7. Look at the Amount of the Budget Devoted to Interest Payments

Think of all of the worthwhile things that tax revene could do. Whatever your priorities, $322 billion would be enormous. The only reason that money is being paid is that the taxes weren't collected up front -- they were postponed indefinitely.

Here's what the CBO is projecting (in billions). Keep in mind this doesn't allow for any economic surprises:

            2003  2004  2005  2006   2007  2008   2009   2010   2011  2012  2013  2014

Interest*  318  322  349  405  460  504  543  579  611  640  665  691 

Spending  2158 2293 2442 2577 2714 2849 2985 3119 3276 3378 3547 3713

%ofBudget   15%  14%  14%  16%  17%  18%  18%  19%  19%  19%  19%  19%

Debt       3914 4334 4694 5009 5329 5660 5984 6295 6506 6588 6675 6753

*Social Security surplus not included
http://www.cbo.gov/showdoc.cfm?index=1944&sequence=0

Bush is the most fiscally reckless president we've ever had by a large margin. It's like something out of a third world country, and the results are inevitable. Every great power that becomes overextended and burdened with debt goes into decline. Bush has done both.

[jsquared]

10. I bet the govt. interest payment calculations are based on today's super

low rates. However, with the continued need for increased borrowing through Treasury issuance rates are likely to rise substantially. So the above figures are probably significantly understated. I would bet 30% of total budget spending would go to debt repayment by 2010.

[cosmicaug]

8. I would think...

I would think that the deficit being x percentage of GDP when the federal debt is seven trillion dollars would be a worse thing than deficit being x percentage of GDP when the federal debt is some smaller amount such as zero. In other words, I would think that a big part of what's significant about the fiscal deficit is the fact that it's contributing to an already bloated federal debt (as long as we have deficits, the debt is growing).

Other than that, it makes sense that the debt be viewed as part of a larger context so yeah, if you have two hypothetical situations where the debt and the deficit are the same, it would make sense to say that the one where the number is a smaller fraction of the GDP (or whatever statistic you might want to use as a proxy for the size of the economy) is the least significant (but do note that these people who say is no big deal will not be able to find a previous time when our federal debt was as big as it is now).

But then again I'm no economist or otherwise have any sort of expertisse in fiscal matters so what do I know. I might be missing siomething here.

[Copernicus]

9. deficits

well, if you take almsot any company - they all have plenty of debt.. most governments just like companies have optimal "capital structure" i.e. mix of debt and equity.. if the cost of debt is low relative to the potential future multiplier on growth produced by fiscal expansion then it does make sense to borrow.. it's especially imprtant to have a countercyclical fiscal expansion in order to support the economy in the times of downturn and cool it off during overheating