Evan Soltas — Balance the Budget? We Can Run Deficits Forever

The U.S. federal government doesn't actually need to balance its budget. Ever. Really. We could run a budget deficit every year for the next century. We'd be just fine.

How do we know? Well, for one thing, we've basically always done that. Between 1929 and 2013, the average federal budget deficit as a percentage of gross domestic product has been 3.1 percent. Over those 84 years, we've run 70 budget deficits and 14 budget surpluses.

The most recent projections of the Congressional Budget Office, in fact, show that in two years, we will have a budget deficit significantly smaller than the long-run average: 2.4 percent of GDP. That's remarkable given that we are only a few years into a recovery from the second-worst recession during those years.

We could run a budget deficit forever and even shrink the relative federal debt burden. All we need to do is keep the long-run budget deficit smaller as a percentage of GDP than the long-run rate of GDP growth. When that happens, GDP outgrows the debt, and the debt-to-GDP ratio declines....

There's even a case for saying that a small budget deficit, maintained forever, helps the economy. Government debt is a safe asset. Safe assets play a crucial role in the keeping financial markets stable. A small budget deficit expands the supply of safe assets in line with growth in the economy....

There'll be a hue and cry over this aspect of the president's budget, but it will be misplaced. It's a non-problem. We have much more to lose by trying to run a balanced budget when we shouldn't be.

Bloomberg | The Ticker
Balance the Budget? We Can Run Deficits Forever
Evan Soltas | Princeton undergraduate

OMG! Teenager Evan Soltas gets it even before he has entered the economics major. God help him after that, but right now he sees reality clearly.