Rich Galen has an entertaining post examining the "disappearing deficit". It turns out that as a result of the 2003 tax cuts, the hallowed-by-Republicans derided-by-Democrats "Bush Tax Cuts," government receipts have increased and the annual federal budget deficit has decreased:
“In February the Federal budget deficit for 2007 was projected to be $244 billion. Today's numbers show that the budget deficit is now just $163 billion.”
“federal receipts have climbed by $785 billion since the 2003 investment tax cuts, the largest four-year revenue increase in U.S. history … The overriding lesson here is that the best antidote for deficits is faster growth, not tax increases.
Economists and politicians alike often ask the question do deficits matter? The short answer is: Of course they do. But they're not as detrimental as conventional wisdom likes to think.
Imagine that the federal government is a recent college graduate: prospects for high income in the future. The graduate has expenses and bills to pay today, so he borrows against his expected rise in future income. Deficit spending is essentially the same thing, the government is borrowing to pay for things today with the assumption that our GDP will continue its strong growth, and thus government revenues will increase in the future.
To illustrate it another way, say the total GDP of the U.S. is $20 billion, and the total debt is $2 billion. The percentage that the debt makes up of GDP is 10%. Over the next few years, the size of the economy grows, but because of deficit spending so does the debt. Now the GDP is $40 billion and the debt is $2.5 billion. However, in this period, the percentage that the debt makes up of GDP has fallen to 6.25%. Over a long enough time line, that percentage becomes so small that it is negligible.
So the long answer to the above question is, deficits matter only if the growth of the total debt outpaces GDP growth.
Related:
Laffer Curve
