Primer: The Difference Between Deficits And Debts

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STEVE INSKEEP, Host:

Budget expert Joe Minarik says it's a tough debate because many people don't get the basics, like the difference between the deficit and the national debt - which is now in the trillions of dollars.

M: It's very clear that a lot of people don't understand it. I've been in meetings on Capitol Hill when people have used the terms interchangeably.

INSKEEP: I'm sorry, on Capitol Hill, where they do the budget?

M: Yeah. It happens.

INSKEEP: Joe Minarik worked in the Clinton administration, and is now with the Committee for Economic Development, which seeks to represent a centrist point of view. For the record, the deficit is how much the U.S. spends beyond its income in any one year. The national debt refers to the obligations that build up over time. They've built up into trillions of dollars.

M: The scale of the debt is what we normally look at, and we measure the debt against our gross domestic product. We have shot through, kind of an imaginary line. It's arbitrary, but budget wonks like myself are concerned at a debt of about 60 percent of the GDP.

INSKEEP: If the debt of the country is about 60 percent of the size of the annual income of the country, that seems like a manageable amount of debt.

M: If you could hold it there, yes. At this point, the debt has shot through that level and we're still growing very rapidly.

INSKEEP: I want to make sure I understand a little better the deficits and debts that we have. I may run a big deficit one year when I borrow a bunch of money to buy a house, which anybody would see is an investment, for which you have long time value. It's a reasonable kind of borrowing. There's other kinds of borrowing that would be bad; if I borrow money to pay off a credit card bill, very very bad - sounding. Is there any way, when you look at a trillion dollar federal deficit like we have now, to say something that is good debt for which we are getting lasting value; it's an investment and some of it is bad debt? Can you divide it up that way at all?

M: Imagine that the money that you charged on your credit card, that you can't pay this month, was to pay the roofer because there was a hole in the roof and water was coming in.

INSKEEP: Okay.

M: You paid him, because the water was going to do a lot more damage than the cost of fixing the roof right now. So, yes, you ran a deficit. It may be that it's going to take you five years to pay it. But in the end, you avoided the worse consequence.

INSKEEP: And I suppose the problem is that having run a couple of trillion dollar deficits, we are still trying to fix the roof here.

M: That's right. And you can get to the point where you are in a vicious cycle. The debt chases the deficit chases the debt.

INSKEEP: Let me ask you about some political arguments that are made over the deficit and debt. Many Democrats will say a large reason for the deficits are President Bush's tax cuts. There's now a debate over whether to renew some or all of those tax cuts. Could you fix this problem simply by raising taxes, letting them go back to the Clinton era taxes? Could you do this by tax policy alone?

M: Not fully. No. Going back to the Clinton tax rates might solve a third of it. Not only the upper income portion, but also the portion for people that...

INSKEEP: Take back everybody's taxes.

M: That's right. And that would not solve the problem all by itself.

INSKEEP: Let's look at the other side. Many Republicans will say we're taxed plenty enough already. This is not a taxing problem. It's a spending problem. Could you realistically fix this problem through spending cuts?

M: And the answer to that one is no as well. Listening to what people are saying about: I want a smaller government, but... Usually what comes after the but, is don't cut my Social Security benefits. Don't cut defense. You take a few of those things off the table and you don't have enough left to eliminate the deficit.

INSKEEP: If I'm sitting here thinking about our original concepts. I've got the deficit, which is a problem at the moment, and I've got the debt, which is a cumulative problem over time, do I have to get the deficit down to zero in order to start paying down the debt?

M: In order to start paying down the debt in dollars, yes. However, if you get to the point where the deficit, as a percentage of the GDP, is lower than the rate at which the economy is growing.

INSKEEP: So it's like over time I'm getting a better-paying job. I have a little more capacity to take on debt even if I'm still building up extra debt in absolute terms.

M: Yeah. Yeah. The peak of the debt as a percentage of the GDP was at the end of World War II, 109 point something percent of GDP. The lowest level was 1974; I think 23 and fraction percent of GDP. Over those 28 years the budget was balanced eight times.

INSKEEP: Most of the time they were deficits.

M: But the deficits were smaller as a percentage of GDP than the rate of growth of the GDP.

INSKEEP: Does that give some cause for optimism here in that you don't have to eliminate the whole deficit, just get it down - get it down?

M: It certainly does make the job look easier. If you can explain that if, you know, you've already gotten the deficit down small enough that at least our debt is not going to be growing faster than our income anymore, then people might say well, OK, let's do it.

INSKEEP: Joe Minarik of the Committee for Economic Development, thanks very much.

M: Thank you for having me.

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