Do we really have to balance the budget?

Josh Barro argues no, and says we really just need a deficit as a percent of GDP that is half of the GDP growth rate. This would stabilize the debt-to-GDP ratio (cumulative debt) at 50% of GDP in the long run. If long run GDP growth were 4% then, you could run a deficit of around 2% of GDP in perpetuity. Doing so would allow the government to finance things that would otherwise not be provided, like health care for my grandmother, a large Military, infrastructure, etc.

I follow the argument, and actually don’t disagree. However, the reality is that for much of the past 50 years the deficit has been larger than the 2% figure he notes. The deficit has been very large the last two years due to the severe economic downturn (~10% GDP), but was consistently larger than this for the entire last decade (2000s), and most of the 1970s-1980s. It was lower or balanced for the last half of the 1990s.

It will take quite a lot of work (taxes will have to go up and spending down over current projections) for us to get the deficit to 2% of GDP from where we are today. Once we get there we can then decide whether to try for long range balance or not.

update: This economix post by Simon Johnson provides useful context and history of the budget deficit across U.S. history.

 

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