Does The Deficit Matter? : The Indicator from Planet Money Budget deficits used to be seen as a bad thing. Today, not so much...and some economists even say they don't really matter. What changed?

Does The Deficit Matter?

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Back when I was growing up in the '80s and '90s, there were a few things that were just universally acknowledged as bad, as evil. No. 1 - fat.



VANEK SMITH: You did not want to eat fat. It was bad. There was no such thing as good fat. It was just all bad fat. And so in the store, there was low-fat everything. There were these low-fat cookies. Do you remember SnackWell (ph) cookies, Cardiff...

GARCIA: Oh, yeah.

VANEK SMITH: ...The little, like, hockey pucks...

GARCIA: I took them to school.

VANEK SMITH: ...That, like, had the consistency of packing foam? Me, too.

GARCIA: (Laughter). Or like, frozen yogurt...

VANEK SMITH: Oh, yeah.

GARCIA: ...That was a big deal back then. It was like a low-fat alternative to ice cream, which also kind of had the consistency of packing foam.

VANEK SMITH: Yes, it did.

GARCIA: That was the '80s...

VANEK SMITH: (Laughter).

GARCIA: ...Just eating a lot of stuff with the consistency of packing foam, like even low-fat butter.

JASON FURMAN: You could have mentioned cholesterol and good cholesterol and bad cholesterol. Is it all bad, you know? That's another one for your list.

GARCIA: That is Jason Furman. He's a professor of economic policy at the Harvard Kennedy School, and he also worked as an economist for the Obama administration. And we wanted to talk to Jason because he writes and he thinks a lot about another kind of universal evil that we had back in the '80s - deficits.

VANEK SMITH: The deficit is the shortfall between the tax revenue the government collects in a given year and the money it spends. When the government spends more money than it takes in, it has to borrow money to cover the shortfall. That is the deficit. By the way, the deficit is not to be confused with the national debt.

FURMAN: So the debt is like the amount of water in the bathtub. And the deficit is like the amount of water that's coming out of the tap in a given period of time and flowing into the bathtub. So the debt is your running total. The deficit is what you do in any given year.

VANEK SMITH: Politicians on the right, on the left, in the center - the one thing they could all agree on was the deficits were bad. It came up a lot.


JIMMY CARTER: Deficit spending should not be a feature of our budget.

BILL CLINTON: We have to cut the deficit because the more we spend paying off the debt, the less tax dollars we have to invest in jobs and education.

RONALD REAGAN: The massive national debt which we accumulated is the result of the government's high-spending diet. Well, it's time to change the diet and to change it in the right way.

GEORGE W BUSH: Government spending is a dangerous road to deficits. The people of America have been overcharged. And on their behalf, I'm here asking for a refund.

GARCIA: But now attitudes about budget deficits are evolving a lot. There's even a whole sort of trendy school of thought in economics now saying that budget deficits don't matter nearly as much as we thought - that unless budget deficits lead to inflation, we can rack up all the deficits we want - no big deal.

VANEK SMITH: Jason Furman is not in that camp. But he says, you know, just like fat, deficits are not the universal evil that we used to think they were - although he did say that he didn't think it was an exact analogy.

FURMAN: It's a little bit different in that there is some timeless truth about dieting. On deficits, I don't even think there is an underlying timeless truth because the world actually is changing. And you know, financial markets, you know, are functioning one way in the '80s, another way now. And you need to, you know, change and update your ideas with those changes in the world.


VANEK SMITH: And I'm Stacey Vanek Smith. Today on the show, deficits. Why did everybody used to think deficits were bad, and what changed?


VANEK SMITH: Today's indicator is a trillion, as in a trillion dollars. This year, the budget deficit is set to hit a trillion dollars. Jason Furman, you're an economist with Harvard's Kennedy School. You also served as an economist under President Obama. A trillion dollars sounds like a lot. That sounds scary.

FURMAN: Oh, no, it is a lot. And that'll be eye-popping for people, absolutely. Do I wish the deficit was smaller? Yes. Would I feel better about our economy if we had a lower debt as a share of our economy? Yes.

VANEK SMITH: So I feel like when I was growing up in the '80s, the deficit was just this universally acknowledged terrible thing. Like, the deficit was bad. I feel like that has changed. But why has it changed? I mean, why did - I mean, it was really talked about, I think, as sort of this universal evil. Like, the one thing we could all agree on was that the deficit was bad.

FURMAN: Sometimes deficits can be good. Sometimes they can be bad. And sometimes they can be just not nearly as important as you'd like to think. The time when they're good is in a recession. You need to get yourself out of a recession. A deficit means you're spending money, you're cutting taxes. That's helping the economy. And in the 1980s, deficits back then really were a problem. Now deficits aren't causing high interest rates, so I don't think they're causing nearly the same magnitude of problems for the economy as they once were.

VANEK SMITH: I feel like they're kind of two parts of the deficit that people tend to worry about. One is this kind of - like, there's almost sort of a morality, like a moral principle at stake about deficits. And the other one is just that it sort of drags our economy down.

FURMAN: You could think about it in terms of morality because it can affect the distribution of income between generations. There, it depends on what you're doing it for. If you're running a deficit to invest in infrastructure, you might actually be helping a future generation. If you're running a deficit to give big tax cuts to people who are going to just run out and spend it today, you might be hurting a future generation. So I think there is a morality at play between how this affects different generations.

VANEK SMITH: So what do you think is the best approach to the deficit right now? I mean, it sounds like maybe one extreme, the other extreme don't - like, neither of those are a good idea. What's a good idea?

FURMAN: I can't give you with scientific certainty exactly what the right way to handle the deficit is. You know, if you have a great new idea for college or a great new idea for Social Security or a great new tax cut you want to do, then, you know, cut spending or raise taxes so that you're not adding to the deficit and making it even higher than it otherwise would have been.

That strikes a middle course. It says you're not making a major emphasis (ph) for deficit reduction; you're just doing no harm. What I wouldn't do, though, is pass a law that makes that deficit even larger.

VANEK SMITH: What are some good things about running a deficit?

FURMAN: You know, the good is, in a recession, it can help stimulate demand, get people and businesses to spend more and help you get out of the recession. In normal times, if you're using the deficit as a way to spend money on good things - like infrastructure, like scientific research - then it can actually make you richer in the future, not poorer.

Now, the flip side, the bad, is if you're spending money on bad things, it can make future generations poorer. And you know, it can drive up interest rates. Probably only happens a little, but it can. And that results in less business investment and less economic growth.

VANEK SMITH: You mentioned that, like, the economics of deficits have changed. How have they changed? Like, what has changed? And what does it mean for deficits?

FURMAN: The single most important number to know in judging a country's fiscal situation is the difference between its interest rate and its growth rate because if your interest rate is higher than your growth rate, your debt is going to be spiraling up as a share of the economy. If your interest rate is lower than your growth rate, that helps contain how much your debt is rising relative to the economy.

Right now in the United States, growth rates are higher than interest rates.


FURMAN: And that's helping us to grow out of some of our debt burden. And it's that key variable - R minus G - watching how that changes over time, is, I think, a real key to understanding, you know, how much you should be worried about deficits at any point in time.

VANEK SMITH: Jason Furman, thank you so much.

FURMAN: Thanks for having me.


VANEK SMITH: This episode of THE INDICATOR was produced by Constanza Gallardo, edited by Paddy Hirsch. Our intern is Willa Rubin. And THE INDICATOR is a production of NPR.


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