In 1998, the Federal budget reported its first surplus since 1969. In 1999, the surplus nearly doubled to $124 billion.
However, every year between 1969 and 1998, the federal government ran a deficit. A deficit is the amount that a year's spending exceeded revenue. The accumulated amount borrowed over the years is over $5.5 trillion. This is the national debt.
Of course, borrowed money including interest has to be paid back. Servicing the national debt has become an important part of each year's federal budget. It is projected that the Government will spend 11 percent of its budget to pay interest on the debt in 2001. While this percentage is lower than it has been in recent years, there are those who still voice concern about the debt. Many of them fear that the government will revert to deficit spending. Is deficit spending dangerous? Economists have different views on this issue.
"Deficit Hawks" and "Deficit Doves"
Some economists, known as "deficit hawks," believe that a reversion to deficit spending would pose a major problem. They argue that running deficits would lead to even larger annual debt payments. To make these high payments, the government would have to increase taxes or eliminate popular government programs like Social Security. The inevitable result would be a steady decline in the standard of living for future generations of Americans. To prevent this, they believe that deficits must be avoided.
Other economists, known as "deficit doves," believe that federal deficit spending and debt are both healthy for the economy. They argue that the national debt must be compared to national wealth. In particular, it should be compared to the Gross Domestic Product (GDP)—the total amount of wealth the country produces in one year. In 1946, while the national debt was only about $270 billion, it amounted to more than 100 percent of GDP. Today, although the national debt is far higher, it amounts to only about 50 percent of GDP. The percentage has dropped because the economy has grown faster than the national debt.
Deficit doves further believe that deficits often help the economy to grow. For example, during the Great Depression of the 1930s, businesses failed, millions lost their jobs, tax revenues plummeted, and the economy was in shambles. Investors feared putting any money into businesses. The economy didn't fully recover until the government started massive deficit spending to finance World War II. At the war's end, many predicted the large debt would lead to stifling inflation. Instead, it led to the prosperous decades of the 1950s and 1960s.
Many deficit hawks agree that deficit spending can spur economic growth in a depressed economy. But they fear deficits that are too large in relation to economic growth. They point to the decade of the 1980s, when the economy boomed. During this period, the national debt as a percentage of GDP grew from about 25 percent to more than 40 percent.
Both deficit hawks and doves want the next generation to avoid economic troubles. The hawks believe trouble will come if we revert to deficit spending. Doves believe trouble will come if the federal government does not start spending more on the nation's infrastructure—its transportation, education, and communication systems.
It is not easy to run a balanced budget since it usually entails tax raises, cuts in federal spending, or a combination of both. Since most Americans believe that their taxes are already too high, few politicians today would argue for tax increases. This leaves cutting government spending. But does Congress, or for that matter the American people, have the will to make major reductions in federal government spending for years to come in order to eliminate the federal debt?
The Balanced Budget Amendment
Attempts to pass a constitutional amendment requiring Congress to balance the federal budget began during the Great Depression. At that time, the national debt was about $50 billion, a small fraction of what it is today. Since then, balanced budget amendments have been introduced in Congress 11 times, including in 1995.
On January 26, 1995, the balanced budget amendment passed the House, 300-132, with 10 votes more than the two-thirds majority needed to pass a constitutional amendment. Action then shifted to the Senate.
Most Senate Democrats opposed the amendment for a number of reasons. Some argued that since President Clinton and the previous Democratic-controlled Congress had already started the process of reducing the deficit, changing the Constitution was not needed. Others wanted a guarantee that Social Security would not be included in the cutbacks necessary to balance the budget. Democratic critics also demanded to know what would happen in the event of a recession or series of natural disasters, which would greatly increase the need for federal relief.
On March 2, every Republican senator except one, along with 14 Democrats, voted to approve the balanced budget amendment. But supporters still fell one vote short of getting the necessary two-thirds majority and the amendment failed to pass. However, arguments over the federal budget continue to be lively topic of discussion among politicians and citizens alike.
For Discussion and Writing
1. What is the difference between the federal deficit and the national debt?
2. What is the disagreement between "deficit hawks" and "deficit doves"? Who do you agree with? Why?
3. Which of the following strategies do you think is the best one to deal with the federal deficit? Why?
- continue borrowing to make up any annual deficits
- increase taxes
- make major cuts in federal spending
- combine spending cuts and tax increases
4. Do you support the balanced budget amendment? Why of why not?
For Further Information
A Citizen's Guide to the Federal Budget: This web page, updated yearly by the Office of the President, details how the Government raises revenues and spends money, how the President and Congress enact the budget, and how the government has been able to move from deficit to surplus.
U.S. Department of the Treasury: The home page of the U.S. Department of the Treasury.
A C T I V I T Y
Balancing the Budget: Hard Choices
This activity asks you to explore the issue of whether a balanced budget amendment should be added to the Constitution.
- Form small groups, each of which will decide by majority vote whether or not to adopt a balanced budget amendment.
- Each group that votes for a balanced budget should justify its cuts and/or revenue increases to the rest of the class. Each group that votes against a balanced budget should justify its deficit spending to the rest of the class. The class should pose questions and challenges to the reporting groups.
- After all groups have reported, make a list of what the class has learned about