NCPA - National Center for Policy Analysis

Downplaying The Deficits

September 13, 2002

Speaking before the Senate Budget Committee, Fed Chairman Alan Greenspan warned that returning to a fiscal climate of continuous large deficits would risk returning to an era of high interest rates, low levels of investment and slower growth of productivity. However, many observers question the malignant power of deficits.

In 2000 the U.S. ran a $127 billion surplus. Last year that fell to a $157 billion deficit. That should have meant economic trouble, but it didn't happen.

  • Interest rates have hit 40-year lows and investment is rebounding.
  • Deficits are meaningless in the short term and matter in the long term only if the nation piles up more debt than it can support.
  • However, that isn't happening: out debt is a manageable 40 percent of GDP -- compared to 45 percent for Ireland, the fastest-growing economy of the 1990s.
  • Sweden, another fast grower, is at 71 percent, Britain is at 48 percent, and the average among all rich countries is 49 percent

The deficit itself also is small relative to our economy. This year it will be about 1.5 percent of GDP. Since 1950, in the best period ever for the U.S. economy, it's averaged about 1.8 percent.

However, observers lament, the deficit has become a political football, and neither economics nor common sense prevails.

Source: Editorial, "Deficit Dread," Investor's Business Daily, September 13, 2002.


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