What would happen if we completely stopped deficit spending by the federal government?

[AndrewR]

If we had to make the REALLY HARD choices, what would happen? Perhaps we could institute a law which allowed for deficit spending in times of national crises, to account for war or economic calamity, but which necessarily were limited in time, perhaps requiring a national referendum for an extension.

Thoughts? We have to do something about the level of spending, going back decades. I just wondered about this possibility after reading an article about California.

 

[Mursilis]

Originally posted by: AndrewR
If we had to make the REALLY HARD choices, what would happen? Perhaps we could institute a law which allowed for deficit spending in times of national crises, to account for war or economic calamity, but which necessarily were limited in time, perhaps requiring a national referendum for an extension.

My idea would be a requirement that any deficit spending must pass by a 2/3 majority. Obviously, this would require a Constitutional amendment. In times of true national crisis, I think gathering a 2/3 majority wouldn't be hard, but in normal times, it would allow a minority to prevent deficit spending.

Thoughts? We have to do something about the level of spending, going back decades.

Absolutely, but neither party has any incentive to balance the budget. Dems buy votes by promising more benefits, and Repubs buy votes by promising less taxes. It's going to take a crisis to force true change.

 

[ElFenix]

is it deficit spending when you tap into the rainy day fund to make up for less revenue? there is budget deficit but no new debt.

 

[BigDH01]

The economy would be severely injured. As much as many people here hate the government and government spending, they use that money to buy goods, pay contractors, etc. That money is used by individuals to purchase goods and by contractors to pay employees. People who say they want a balanced budget don't really understand the impact this would have. The fact that we can have a 1 trillion dollar deficit and an economy that's still in decline is just evidence of the severe structural deficiencies in our economic system. We have a devastating case of excess capacity and low demand. If you remove another 1 trillion dollars from the demand-side, you could be in a real world of hurt. Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved.

 

[bamacre]

It would all depend on where spending is cut.

 

[Mursilis]

Originally posted by: BigDH01
The economy would be severely injured. As much as many people here hate the government and government spending, they use that money to buy goods, pay contractors, etc. That money is used by individuals to purchase goods and by contractors to pay employees. People who say they want a balanced budget don't really understand the impact this would have. The fact that we can have a 1 trillion dollar deficit and an economy that's still in decline is just evidence of the severe structural deficiencies in our economic system. We have a devastating case of excess capacity and low demand. If you remove another 1 trillion dollars from the demand-side, you could be in a real world of hurt. Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved.

Obviously, the nation can't just balance the budget overnight, but as the OP noted, deficits have been going back decades. Even when the economy recovers, Congress likely still won't balance the budget. Look at the history of the past 40 years.

 

[Mursilis]

Originally posted by: ElFenix
is it deficit spending when you tap into the rainy day fund to make up for less revenue? there is budget deficit but no new debt.

A rainy day fund? What's this strange, mythical thing of which you speak?!?

 

[cubeless]

Originally posted by: BigDH01
The economy would be severely injured. As much as many people here hate the government and government spending, they use that money to buy goods, pay contractors, etc. That money is used by individuals to purchase goods and by contractors to pay employees. People who say they want a balanced budget don't really understand the impact this would have. The fact that we can have a 1 trillion dollar deficit and an economy that's still in decline is just evidence of the severe structural deficiencies in our economic system. We have a devastating case of excess capacity and low demand. If you remove another 1 trillion dollars from the demand-side, you could be in a real world of hurt. Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved.

yikes... if you don't prop up the excess capacity it will go away... that's (sort of) how our system is supposed to work... sometimes it's painful... when you prop up the excess you get bubbles that make the eventual unwinding even worse...

and 'Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved' is like saying that solar will be a better solution once we can make the sun quit going down every day... you 'solve' the problem by letting the market dissolve the excesses... it's messy sometimes, but it's supposed to be the way we do it...

 

[Moonbeam]

We would vote out the incumbents.

 

[StageLeft]

Originally posted by: ElFenix
is it deficit spending when you tap into the rainy day fund to make up for less revenue? there is budget deficit but no new debt.

In a way yes, but it's the same as somebody who just got fired using his savings as opposed to his credit card. It's a much better place to be.

 

[Beattie]

Everyone would be better off if they didn't spend money they don't have. The government included.

 

[QuantumPion]

Originally posted by: Moonbeam
We would vote out the incumbents.

Exactly. Everyone wants to cut spending, but no one wants to cut THEIR spending. Even the failpublicans. They only talk big when they aren't in power and their decisions don't matter anyway.

Argh, I just agreed with Moonbeam! My brain hurts...

 

[Mursilis]

Originally posted by: QuantumPion

Originally posted by: Moonbeam
We would vote out the incumbents.

Exactly. Everyone wants to cut spending, but no one wants to cut THEIR spending. Even the failpublicans. They only talk big when they aren't in power and their decisions don't matter anyway.

This is essentially true, which is why we'll need structural change to deal with continuous budget deficit issues. You simply can't trust the politicians with money. It's like trusting a dieter with your cookies and ice cream - the tempation is just too strong. Look at the looting of the SS "trust" fund - what a farce. The reason why budgets are getting balanced on the state level and not the federal level is because many states have structural impediments to sustained borrowing, forcing politicians to restrain themselves. Politicians don't balance budgets because they want to - they only do it because they have to.

 

[BigDH01]

Originally posted by: Mursilis

Originally posted by: BigDH01
The economy would be severely injured. As much as many people here hate the government and government spending, they use that money to buy goods, pay contractors, etc. That money is used by individuals to purchase goods and by contractors to pay employees. People who say they want a balanced budget don't really understand the impact this would have. The fact that we can have a 1 trillion dollar deficit and an economy that's still in decline is just evidence of the severe structural deficiencies in our economic system. We have a devastating case of excess capacity and low demand. If you remove another 1 trillion dollars from the demand-side, you could be in a real world of hurt. Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved.

Obviously, the nation can't just balance the budget overnight, but as the OP noted, deficits have been going back decades. Even when the economy recovers, Congress likely still won't balance the budget. Look at the history of the past 40 years.

A quick and cursory Google search yields this. You'll see that total debt in dollars was pretty stable from 1950 until the early 80s. As a percent of GDP, the debt was actually shrinking until the early 80s when it started to rise.

This is more evidence of what I was alluding to. There is not enough aggregate demand without deficit spending to support our current economic paradigm. This spending is necessary as long as we function under the deluded belief that supply-side economics work. The government can't balance the budget without hurting the economy. This is also why people really can't save. If the average American saved a significant portion of their earnings, the economy would be demolished. We depend on deficit spending on all levels to match our level of capacity. Now that Americans have less money to spend, the government has to pick up the slack. I don't expect the government will ever be in a position to balance the budget until there are some drastic fundamental changes in how our economy works. The wonder of supply-side economics. Reagan believed we could produce our way out of stagflation, but, ironically enough, we've produced our way into a debt prison.

If you want capacity numbers, just go here. You can see that capacity utilization is as low as it's ever been. Total industry is at 68% capacity in June. The other low is 73.5% after dot-bomb. If/when we recover to mid 90s levels, we'll still depend on gov't deficits to maintain the high capacity utilization that saw economic growth through the 80s and 90s.

What this also means as that we are nearing 10% unemployment and our capacity utilization is still at 68%. The unemployment pain has just begun. We simply don't have enough domestic or foreign demand to support the size of our economy. There are too many people and too many goods. This is a very vicious cycle.

There is a good thread about this at Ars Technica where this very issue is being discussed. Technology has allowed us to increase capacity without also increasing employment (and by extension, demand). This has almost necessitated government increasing demand to purchase the new supply. Going into the future, we are faced with two possible prospects. We can accept that demand is going to continue to shrink and just live in a world where displaced people simply can't afford supply or we will live in a world where people are basically paid to perform tasks that don't generally contribute to societal utility, thereby trying to maintain demand. There might simply be more people in the modern world than is needed to supply all of us with what we demand.

Is it true? Don't know. You can view the discussion here.

 

[themusgrat]

Originally posted by: BigDH01
The economy would be severely injured. As much as many people here hate the government and government spending, they use that money to buy goods, pay contractors, etc. That money is used by individuals to purchase goods and by contractors to pay employees. People who say they want a balanced budget don't really understand the impact this would have. The fact that we can have a 1 trillion dollar deficit and an economy that's still in decline is just evidence of the severe structural deficiencies in our economic system. We have a devastating case of excess capacity and low demand. If you remove another 1 trillion dollars from the demand-side, you could be in a real world of hurt. Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved.

It's like telling a fat woman going through a relationship problem that she has to get in shape in 2 months. Sure, not eating won't help her emotions at all, but either she gets into shape now, or puts it off, in which case she prolly never gets into shape.

At some point, we do have to balance the budget, and it will hurt no matter when it is. But it has to be done, and the sooner the better. Increasing the deficit by trillions of dollars a year is beyond disgusting, our government is completely inept. There really is no good argument to not completely balance the budget for 2010 and not go over a single penny.

 

[her209]

Originally posted by: Beattie
Everyone would be better off if they didn't spend money they don't have. The government included.

People shouldn't take out loans to buy cars, houses, college tuition, etc. then?

 

[BigDH01]

Originally posted by: cubeless

Originally posted by: BigDH01
The economy would be severely injured. As much as many people here hate the government and government spending, they use that money to buy goods, pay contractors, etc. That money is used by individuals to purchase goods and by contractors to pay employees. People who say they want a balanced budget don't really understand the impact this would have. The fact that we can have a 1 trillion dollar deficit and an economy that's still in decline is just evidence of the severe structural deficiencies in our economic system. We have a devastating case of excess capacity and low demand. If you remove another 1 trillion dollars from the demand-side, you could be in a real world of hurt. Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved.

yikes... if you don't prop up the excess capacity it will go away... that's (sort of) how our system is supposed to work... sometimes it's painful... when you prop up the excess you get bubbles that make the eventual unwinding even worse...

and 'Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved' is like saying that solar will be a better solution once we can make the sun quit going down every day... you 'solve' the problem by letting the market dissolve the excesses... it's messy sometimes, but it's supposed to be the way we do it...

If the market dissolved its excesses, the correction would be so severe as to basically annihilate our economy. We are at 68% capacity utilization with 1 trillion dollars in deficit spending. If we balanced the budget and knocked off say another 10% of that we'd be down to 58% capacity. To bring it up to historical levels, we'd have to eliminate 22% of our current capacity. We simply don't have the societal safety nets to handle that number of out-of-work people. I don't foresee a scenario in which we could maintain order in that case.

 

[quest55720]

I don't think it would hurt nearly as much as people think. I am sure government like the private industry would get more efficient when facing budget cuts. I would love to see government spending cut a certain percentage every year till there is a surplus to begin to pay off this monstrous debt. This will never happen as this government is completely corrupt and inept. The best we can hope for is the 90s with gridlock keeping congress from doing any more harm.

 

[BigDH01]

Originally posted by: themusgrat

Originally posted by: BigDH01
The economy would be severely injured. As much as many people here hate the government and government spending, they use that money to buy goods, pay contractors, etc. That money is used by individuals to purchase goods and by contractors to pay employees. People who say they want a balanced budget don't really understand the impact this would have. The fact that we can have a 1 trillion dollar deficit and an economy that's still in decline is just evidence of the severe structural deficiencies in our economic system. We have a devastating case of excess capacity and low demand. If you remove another 1 trillion dollars from the demand-side, you could be in a real world of hurt. Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved.

It's like telling a fat woman going through a relationship problem that she has to get in shape in 2 months. Sure, not eating won't help her emotions at all, but either she gets into shape now, or puts it off, in which case she prolly never gets into shape.

At some point, we do have to balance the budget, and it will hurt no matter when it is. But it has to be done, and the sooner the better. Increasing the deficit by trillions of dollars a year is beyond disgusting, our government is completely inept. There really is no good argument to not completely balance the budget for 2010 and not go over a single penny.

Your analogy is too simplistic.

You think the government is inept, and that may be true, but it doesn't change the fact that our economy, and perhaps society, depends on that deficit spending. I know many people think that going cold turkey is the best solution, but it would likely be a disaster. You have to fix the fundamental flaws and understand the problem before you make such a rash move.

 

[fskimospy]

Originally posted by: AndrewR
If we had to make the REALLY HARD choices, what would happen? Perhaps we could institute a law which allowed for deficit spending in times of national crises, to account for war or economic calamity, but which necessarily were limited in time, perhaps requiring a national referendum for an extension.

Thoughts? We have to do something about the level of spending, going back decades. I just wondered about this possibility after reading an article about California.

It would cause a catastrophe. Issuance of debt is how government introduces more money into our economic system, and as our system grows it requires more money to be floating around. To eliminate the government's ability to create new debt would cause a lot of problems.

 

[imported_inspire]

Originally posted by: BigDH01
The fact that we can have a 1 trillion dollar deficit and an economy that's still in decline is just evidence of the severe structural deficiencies in our economic system. We have a devastating case of excess capacity and low demand. If you remove another 1 trillion dollars from the demand-side, you could be in a real world of hurt. Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved.

I personally feel this phenomenon is more indicative of inefficiency than a deficiency. The inefficiency can be corrected, if we have the stomach for it. Supply and demand has no conscience, and deficit spending only enables it.

 

[Beattie]

Originally posted by: her209

Originally posted by: Beattie
Everyone would be better off if they didn't spend money they don't have. The government included.

People shouldn't take out loans to buy cars, houses, college tuition, etc. then?

Well, ideally yea. I guess a house is big enough of an expense and appreciates (usually) well enough to be worth taking a loan though.

 

[PJABBER]

I am really concerned about the demographic shifts that are still to play out.

Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs ? Medicare, Medicaid, and Social Security.

The Congressional Budget Office Director has just posted a commentary that Federal spending on Medicare, Medicaid, and Social Security will grow relative to the economy both because health care spending per beneficiary is projected to increase and because the population is aging.

CBO projects that if current laws do not change, and remember that the current health care proposals are for massive increases, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035.

Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for fiscal policy. If we can't do that, we are in big trouble.

CBO Long Term Outlook

 

[BigDH01]

Originally posted by: inspire

Originally posted by: BigDH01
The fact that we can have a 1 trillion dollar deficit and an economy that's still in decline is just evidence of the severe structural deficiencies in our economic system. We have a devastating case of excess capacity and low demand. If you remove another 1 trillion dollars from the demand-side, you could be in a real world of hurt. Maybe we can balance the budget after the fundamental problems of supply vs demand have been solved.

I personally feel this phenomenon is more indicative of inefficiency than a deficiency. The inefficiency can be corrected, if we have the stomach for it. Supply and demand has no conscience, and deficit spending only enables it.

The laws of supply and demand have no conscience, but we do. It would be corrected by the sudden loss of millions of jobs. You ought not be so sure you aren't one of the jobless. And if that doesn't bother you, then think of a world where the jobless have no access to safety nets, healthcare, job assistance, education, etc, all in the name of economic efficiency.

The definciency arises from the fact that we don't have enough "middle-class jobs" to satisfy our population unless we have massive deficit spending. Your road is one to aristocracy and ruthless abandonment. I see there's another thread now about Pat Buchanan and his article about the size of government and how our ancestors would've felt about it. I've read a great deal of work by Jefferson, Adams, etc and you'd be surprised about how they felt about equality, especially as it pertains to freedom and democracy. While these men might be surprised by the size of our government, I think they'd be more surprised by how we so willingly discard our fellow citizen in the name of economic efficiency and the almighty dollar.

 

[imported_inspire]

Originally posted by: BigDH01
The laws of supply and demand have no conscience, but we do. It would be corrected by the sudden loss of millions of jobs. You ought not be so sure you aren't one of the jobless. And if that doesn't bother you, then think of a world where the jobless have no access to safety nets, healthcare, job assistance, education, etc, all in the name of economic efficiency.

The definciency arises from the fact that we don't have enough "middle-class jobs" to satisfy our population unless we have massive deficit spending. Your road is one to aristocracy and ruthless abandonment. I see there's another thread now about Pat Buchanan and his article about the size of government and how our ancestors would've felt about it. I've read a great deal of work by Jefferson, Adams, etc and you'd be surprised about how they felt about equality, especially as it pertains to freedom and democracy. While these men might be surprised by the size of our government, I think they'd be more surprised by how we so willingly discard our fellow citizen in the name of economic efficiency and the almighty dollar.

Before going further, I'd like to say that I have actually read through your points and considered them. They're definitely something to think about.

With regards to my comment and your response to the concept that supply and demand has no conscience, I'm not so sure that people, collectively, particularly government, has a conscience, either. The 'safety nets' they put in place are largely an effort to consolidate power and wealth.

I tend to think of my road as a type of frontierism. There are jobs to be done in this country, but unfortunately, for countless circumstantial reasons, many people can't get to them. I feel that while we should be nudging people towards these opportunities, the current policies only encourage people to hold their breath and ride it out.

Jefferson and Adams get little respect from me in the context of this discussion. The economics of Colonial America were based on slavery. When the northern part of the country successfully industrialised, they afforded themselves a moral conscience and the resulting imposition of it on the rest of the country lead to deadliest war in American history.

That all being said, I understand your points, and I agree with them, largely. I just don't see this cycle as remotely sustainable. I wish I had a better idea, but it's not a simple problem.