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  • Deficits Bad?

    Posted by Jonathan on February 10th, 2003 (All posts by )

    Johnathan Pearce cites Andrew Sullivan’s critical observations about increased federal spending under George W. Bush. Sullivan makes a good point. However, Pearce goes Sullivan one better and decries federal deficits, which are not quite the same issue.

    Deficits are actually an important constraint on federal spending. In the ideal world we would have a small and balanced federal budget, but our more likely alternatives are a large federal budget with a deficit or a large federal budget with a surplus. A surplus functions much like a silent tax increase whose proceeds will be spent by Congress (as happened in the 1990s), whereas a deficit leads mainly to additional federal borrowing — which is less destructive to productivity and incentives than are tax increases and may itself create pressure for reduced spending. Surpluses allow legislators to increase spending without incurring the political costs associated with explicit tax increases, while deficits create political pressure to spend less. The question of whether to balance the budget is not trivial, but the main goal should be to reduce the overall level of government spending. Ironically, deficits, because of their negative political consequences, may advance this goal most effectively.

    Politicians tend to like surpluses and dislike deficits. That should tell us something.