The Consequences of the Federal Deficit

The Obama administration announced Friday that the nation exceeded $1 trillion in federal deficit spending for the second consecutive year, according to Fox News. The government had to borrow 37 cents out of every dollar it spent. 

Some national experts give their views of the consequences of the federal deficit:

Robert P. Murphy, Senior Fellow in Business & Economic Studies, Pacific Research Institute

More and more analysts, including those associated with the European Central Bank, are realizing the wisdom of fiscal austerity.

Simply put, when an economy is on the ropes, that is precisely when government should reduce its own spending to return real resources to the private sector.

If the US federal government continues to run massive, trillion-dollar-plus deficits, Americans will find that they can have as long a recession as they are willing to pay for.

Tad DeHaven, budget analyst on federal and state budget issues, Cato Institute

It wasn't long ago that folks, including some who now say such massive deficits are nothing to worry about, were fretting over $300 billion deficits.

According to the apologists, these trillion-plus deficits have been necessary to help the economy. But robbing Peter (and his children) to pay Paul was never going to be the magic elixir for treating the country's economic ailments.

We were already on an unsustainable fiscal path prior to the recession. The fiscal irresponsibility of the Bush and Obama administrations is only making that path more treacherous.

Gerald Prante, Senior Economist, Tax Foundation

The newly announced federal deficit of $1.3 trillion for 2010 is the second largest in history, a bit smaller than the record-setting $1.4 trillion deficit in 2009. Unfortunately, the administration forecasts another $1.4 trillion deficit in 2011.

The federal deficit is large for both structural and cyclical reasons. Most important is the state of the macro economy. A slow economy has depressed revenues and would have caused spending on Medicaid and unemployment benefits to increase even if expansions of those programs had not been enacted.

But spending on those and other programs was expanded by Congress and the President as a response to the economic downturn, further increasing the deficit. Foremost among those measures was the stimulus bill, which added greatly to this year's large deficit. But all that said, even ignoring the current downturn and the temporary provisions enacted in response to it, the federal budget would still be in structural deficit.

The structural deficit demands a long-term solution. Regardless of whether politicians say we should be spending more or less to help the economy, hardly any of them have even acknowledged that the trajectory of federal spending has and will continue to far outpace the revenue our tax system is capable of generating, absent major tax reform.