When should we start worrying about the deficit?

• Author: Adams, Tucker Hart
• Position: [the] ECONOMIST

The public ... realizes that there is a significant adjustment to come, but they tend to think it can be solved by increasing taxes they don't pay and cutting spending that they don't benefit from.

--Robert Chote

Sooner or later we are going to have to deal with the issue of the federal budget deficit. One of my Ten Rules for Understanding the Economy--the second one, actually--is, "You can't forever spend more than you make." This applies to the government as well as to individuals.

I'm not of the school that screams for a balanced budget at all costs. There are times in the business cycle when deficit spending is quite appropriate. The government can borrow to help replace private spending when it collapses during a serious recession through increased infrastructure spending as well as expanded unemployment and welfare benefits. Many of the recent actions of the Treasury, the Federal Reserve and Congress were necessary in the face of the impending collapse of the international financial system in 2007 and 2008.

But deficit spending--having appropriations exceed tax revenues--during economic booms is not appropriate. Our federal budget has been in deficit for 46 of the last 50 years. Through good times and bad, through the three longest expansions in our nation's history, we have spent more than we collected in tax revenues, leaving it to later generations to worry about paying off the debt.

In theory, since it is able to issue debt and print money, the government can run deficits indefinitely IF the deficit does not grow faster than the nation's output of goods and services.

Unfortunately, when the spending and borrowing during the recent recession is added to the enormous Social Security and Medicare deficits facing the country as the baby boom moves into retirement, our debt to output ratio is set to rise rapidly for many years. In mid-2010, the federal debt was a bit more than $13 trillion, with about 66 percent held by the public and 34 percent held by government agencies such as the Federal Reserve. Based on current projections, this will double over the next 10 years. You can watch it grow in real time on websites like www.usdebtclock.org.

Economists who think deficits don't really matter often argue that Japan...