Are deficits a bad thing?

Jan. 2, 2004 — Q: I would like to know your opinion about deficits generally speaking ( governments, states, cities, people, etc.) — Francisco L.

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A: When it comes to my own bank account, I’d always prefer to have a surplus than a deficit.

For governments, the question is not as clear cut. In the U.S., until recently, the question was mainly academic. The government had run deficits for so many years that most people had all but given up on the idea of balancing the budget. But thanks to a remarkable alignment of political forces – and a booming economy and stock market – the U.S. budget swung to a significant surplus as the new Millennium approached.

The U.S. government still owed trillions of dollars to investors who hold U.S. Treasury bonds (the national debt, which is the accumulation of years of budget deficits). But as long as the budget ran a surplus, that extra cash could be used to pay off that debt. You might think that was a good thing – kind of like have enough money left over every month to pay off your credit card debt.

But the current government (White House and Congress) have taken a different view. The thinking is: If the government is taking in more in taxes than it’s spending, then taxes are too high. So thanks to one of the biggest tax cuts in U.S. history – along with the unexpected cost of fighting wars in Iraq and Afghanistan – the U.S. budget is running big deficits again. The talk now is of cutting that deficit, but no one seriously believes we’ll see a surplus again any time soon.

For states and cites, the situation is somewhat different. Though states can issue bonds, many require that their budgets balance every year, which means raising taxes or cutting spending – or both. States like California are feeling the effects of a big drop in tax revenues (after the Internet bubble burst) and now face painful choices as a result. And because a part of their financial well-being depends on contributions from the federal government, states don’t entirely control their own economic fate. This is even more the case for budgets of major cities, which often cover the cost of services enjoyed by people who don’t live in the city and, therefore, don’t have to pay taxes to pay for those services.

So generally speaking, I suppose the ideal circumstance would be neither deficit nor surplus but a balanced budget based on tax revenues that rise very slowly. But unless and until Goldilocks is in charge, I wouldn’t count on that happening.