Deficit dynamics

Everyone knows the national deficits and debt are financial problems. Recently we had two commissions that made recommendations for dealing with the deficits and debt. What would be the strategy used for dealing with these problems? N.C. State University economist Mike Walden responds.

“Well, first … a few definitions. The deficit is the annual amount that is added to the annual debt.  It is kind of like with your credit card: It is what you put on your credit card in a given year. The debt is like the outstanding balance on your credit card; it is what you owe, accumulated from all your past borrowing.

“And we did have a couple of commissions report … on trying to deal with the deficits, the annual deficits, as well as the long-run debt. Their strategy is really to look at two percentages. One is the percentage of federal government spending as a percent of our economy. The second is the percentage of federal government revenues as a percent of our economy.

“Right now those are far apart. Spending is about 25 percent of our economy; revenue is about 15 percent of our economy. Now a big part of that reason is the recession. Those numbers will come together as the recession ebbs.

“But previously — even before the recession — we did not have those numbers together. So what those two commissions have to work on is trying to reduce the relative size of spending — maybe get that down to 23percent, and then hopefully get the percentage of revenues up higher — maybe to 21, 22 percent. And we can accommodate a small deficit, a relatively small deficit each year. The point is to try to get the deficit growing at a smaller pace than the economy is growing; that will actually shrink the relative size of the debt down the road.

“This may all sound very simple, but even moving those two numbers — the spending percentage and the revenue percentage — by a couple of percentage points, we are talking about hundreds of billions of dollars.”