Why Don’t Republicans Love Deficits Anymore?

The notion that deficits can never be permanently sustainable seems to be driving the Republican Party's initiative to balance the budget within a decade.

My colleague Evan Soltas has ably explained why we never need to balance the budget: So long as the economy keeps growing, the government can keep borrowing more money, and it's all sustainable if the debt does not grow too large relative to the economy. That's how it's been possible for the U.S. government to run budget deficits every year since the 1970s, save a handful during the Bill Clinton administration, without blowing up the economy.

People are resistant to this message. The idea that deficits are permanently sustainable is not intuitive; people feel that if you borrow money now, you have to repay it later.

This notion that deficits can never be permanently sustainable seems to be driving the Republican Party's initiative to balance the budget within a decade. It's another example of people applying individual financial logic to the government and getting led astray.

There are appropriate times for individuals to borrow, such as when getting an education or buying a home. But over a lifetime, the individual is supposed to be working to pay down debts and build wealth, so he or she can afford to stop working in old age. Thrift and saving (and a downward trajectory for debt balances) are virtuous traits in people, because of our life cycles.

But the government does not have a life cycle; it plans to exist indefinitely. So it makes much more sense to compare the government to a corporation, which also plans for indefinite existence and therefore may have debt as a permanent part of its capital structure. There is not necessarily an expectation that a firm will decrease its debt load over time, and if a company keeps growing, its debt load may keep getting larger without being a sign of financial distress.

That's not to say that a corporation (or a government) can never borrow the wrong amount. A company can expose itself to excessive bankruptcy risk by overleveraging. Or if it's not leveraged enough, it may be paying too much for capital. Similarly, government deficits do matter -- they just don't always matter such that smaller is better.

The U.S. does have a medium-term deficit sustainability problem, though it looks a lot less dire than it did a couple of years ago. This is because Congress and the president have taken steps to reduce deficits and medical inflation has been slowing. Still, over time, lawmakers will have to put more downward pressure on the budget deficit. But there is no need to take further deficit reduction action this year or next, and the deficit will never have to go to zero.

There was a time when Republicans knew this; after all, our nearly annual budget deficits since World War II have come under both Democratic and Republican administrations. If Republicans would re-learn the fact that budget deficits can be OK, the fiscal policy debate in Washington D.C. would get smarter.

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