Why should we care about a balanced budget?

A viewer asked this question on 3/27/2000:

what would balancing the federal budget do the US economy

budgetanalyst gave this response on 3/28/2000:

First, keep in mind that the Federal budget is currently balanced, was so last year, and will be so next year. In fact, the budget is in surplus. The effect on the economy is already here. There is nothing else to be gained.

I theory, the effect of an unbalanced budget, or one that runs a deficit, is that it displaces other economic activity. Government uses resources of the economy, keeping others from having access to these resources. With a deficit the government takes an even large share than it otherwise would. Since government is assumed to be less efficient than other economic actors, the economy then does not function as well as it could.

One of the manifestations of the inefficiency is in higher interest rates than otherwise would be the case because government has to borrow money to fund the deficit, bidding up the cost of money and keeping private firms from having as much capital as they otherwise would have. Another effect is inflation; with the additional economic activity caused by the money the government borrowed, goods and services are also bid up, raising the costs for them.

Another factor which is not solved by balancing the budget but is the result of running deficits is the national debt. Interest payments on this debt keep getting larger with every additional year of deficits, eventually resulting in interest payments the largest component of the national budget. Interest payments do not buy goods and services for the government, so the larger they are the less the government can do and the more money it has to raise simply to keep even. But a budget in surplus lets the government pay off its debt, reducing its interest payments and reducing its need for taxes and to borrow money. This, in turn, makes more resources available to private firms at less cost, improving economic efficiency and reducing inflation.

All of these factors are in play in today's economy, and contribute to the unprecedented economic boom what we live in.

JesseGordon responded:


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