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Who’s Afraid of Budget Deficits?

How Washington Should End Its Debt Obsession

Budget buster: Trump after signing a tax bill, Washington, D.C., December 2017 Jonathan Ernst / REUTERS

The United States’ annual budget deficit is set to reach nearly $1 trillion this year, more than four percent of GDP and up from $585 billion in 2016. As a result of the continuing shortfall, over the next decade, the national debt—the total amount owed by the U.S. government—is projected to balloon from its current level of 78 percent of GDP to 105 percent of GDP. Such huge amounts of debt are unprecedented for the United States during a time of economic prosperity.

Does it matter? To some economists and policymakers, the trend spells disaster, dragging down economic growth and potentially leading to a full-blown debt crisis before too long. These deficit fundamentalists see the failure of the Simpson-Bowles plan (a 2010 proposal to sharply cut deficits) as a major missed opportunity and argue that policymakers should make tackling the national debt a top priority. On the other side, deficit dismissers say the United States can ignore fiscal constraints entirely given low interest rates (which make borrowing cheap), the eagerness of investors in global capital markets to buy U.S. debt (which makes borrowing easy), and the absence of high inflation (which means the Federal Reserve can keep interest rates low).

The deficit dismissers have a point. Long-term structural declines in interest rates mean that policymakers should reconsider the traditional fiscal approach that has often wrong-headedly limited worthwhile investments in such areas as education, health care, and infrastructure. Yet many remain fixated on cutting spending, especially on entitlement programs such as Social Security and Medicaid. That is a mistake. Politicians and policymakers should focus on urgent social problems, not deficits.

But they shouldn’t ignore fiscal constraints entirely. The deficit fundamentalists are right that the debt cannot be allowed to grow forever. And the government cannot set budget policy without any limiting principles or guides as to what is and what is not possible or desirable.

There is another policy approach that neither prioritizes cutting deficits nor dismisses them. Unlike in the past, budgeters

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