Part 2. Why should we care about the federal budget deficit, anyway?

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The quick answer is that, if we do not contain our budget deficit and the growth of the national debt, our quality of life will be significantly worsened.

In the short term, the magnitude and persistence of the deficit has created tremendous uncertainty about how it will be reduced, leading businesses to delay investments and hiring until the situation stabilizes(1). Political skirmishes related to the debt – such as the standoff over raising the federal debt ceiling in 2011 – have unnerved markets and diminished confidence in the macroeconomic stability of the United States(2). It is clear that the American economy will not be able to run at full-throttle until there is a credible solution to the budget deficit.

In the long term, high levels of debt have been associated historically with slower growth. The most widely-cited scholars of the subject, Carmen Reinhart and Kenneth Rogoff, have found that when public debt exceeds 90% of GDP, economic growth is more than a full percentage point lower than it would have been otherwise (3). Depending on the measure one uses for the United States’ federal debt, we are either close to this level or past it.

With unemployment nearing 8%, we desperately need growth and jobs, and to get growth and jobs we need to reduce the deficit and the debt.

More broadly, many of the federal government’s most important functions require citizens to believe that it can honor its promises over their entire lifetimes. For example, current workers pay into Social Security today, with the understanding that the program will be there for them throughout their retirement several decades hence. Running chronic deficits undermines confidence in the government’s ability to follow through on its promises. By their own trustees’ forecasts, Medicare and Social Security will not be able to fully fund the benefits that beneficiaries have been promised by 2024 and 2033, respectively – soon enough to impact people who are already retired today(4).

Preventing the build-up of federal debt also has a significant moral dimension as well. Bequeathing to future generations a country mired in debt, which they had little or no part in creating, is an ugly legacy. One way to measure whether this is happening is to look at the inter-generational accounting of federal programs. Actuarial calculations show that current retirees receive more in benefits than they paid into Social Security and Medicare. If that gap is plugged with either debt or benefits cuts for future retirees, future generations will pay the price for current generations’ inability to balance their books.

If the deficit is not reduced, it will threaten the job growth that is needed to put millions of people back to work, imperil the programs upon which tens of millions depend, and leave a terrible moral stain on current generations, for their willingness to leave a multi-trillion dollar mess for their children and grandchildren to clean up.

In the next post, we’ll talk about the upcoming fiscal cliff, and why it is likely to dominate news coverage through the end of the year and beyond.

In the meantime, don’t forget to vote!