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On the Deficit

2004-10-25

Category: politics

We've all heard politicians talk about the deficit for a very long time now. I know I've heard about it for as long as I can remember. The question is, how important is the deficit? Well, here are a few things to consider.

A deficit happens when the government spends more than it takes in. You'll hear it called the national debt. It's like when your monthly income runs a little low and you have to put things on your credit card. The government's income is from taxes and service fees. The government then spends the money on soldiers, bridges, and $500 screwdrivers.

It's easy to understand this if you look at your own experiences as well as those around you. If you can get by without borrowing, that is, without using credit, you get to use your money and don't have to pay interest. If you borrow a little to carry you over a bad spot but then pay it back quickly, you've used credit in one of the best ways. If you borrow a little to buy things that will then turn you a profit greater than the cost of the interest and repayment, then you've really done good. Unfortunately, there is another way to use credit.

If you borrow and cannot pay back the debt, the interest grows. Eventually, the interest builds the total due into an amount that you can never pay back. You may know people who use credit cards until the minimum amount due each month is so large that there is no possible way they can make the payment.

That's where people wonder if the country's debt is getting too big. You see, there are times when it's ok for the government to run a deficit. During times of strife, the country made need to borrow a little to get by. The amount has to be an amount that can be paid back in short order. It's like the buying on credit card example I gave above. As long as you only do it in an emergency and pay it back right away, it's fine. It's what credit is for.

If, however, the country borrows more than it can pay back then things just get worse from there. It will spiral out of control. Eventually, the interest on the debt will be so high that the government has to pay almost all of its income to try to keep up with the debt. There are plenty of accounts of smaller nations going through this sort of problem. It is always followed with political upheaval. It's not a pretty picture.

So, are we headed toward such a thing?

That's a tough question. Since the ability to pay back the debt depends on future income, you have to know what that income will be. For the credit card user, he or she usually works at a steady job with predictable income. You'll have a reasonable guess about the amount you can pay. If you work purely on commission or some other irregular pay scale, you may not be as confident about your ability to repay your debt.

Well, the government's income is based heavily on taxes and national productivity. If the populace is not very productive, the tax income goes down. It's hard to predict what monies will be available to pay the debt in the coming years. Different people have different philosophies on what the income will be; therefore we have differing views of reasonable debt.

Though I enjoy Economics, I am not an Economist. That means I'm not particularly qualified to make arguments based on the math. I have to rely on the expertise of, well, experts.

On Sunday, October 24, 2004, the Business Leadership Council of Cedar Rapids held a symposium on the effect of public debt on small businesses. The guest of honor was Nobel Prize winning Economist George Akerlof. He's the Koshland Professor of Economics at U.C. Berkeley. I think he qualifies as an expert.

I attended the symposium. During the event, Professor Akerlof talked at length about the national deficit. He seems to think that it is too high and, if we don't fix it almost immediately, we'll be headed down that dangerous path. There may be Economists who disagree with him, but they'll be hard pressed to top his credentials.

So, what do I believe? I believe that I must defer to an expert. He says the deficit is bad. Therefore, I must assume that the deficit is bad.


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