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For the applied economist, the confident and apparently successful application of Keynesian principles to economic policy which occurred in the United States in the 1960s was an event of incomparable significance and satisfaction. These principles led to a set of simple, quantitative relationships between fiscal policy and economic activity generally, the basic logic of which could be (and was) explained to the general public and which could be applied to yield improvements in economic performance benefitting everyone. It seemed an economics as free of ideological difficulties as, say, applied chemistry or physics, promising a straightforward expansion in economic possibilities. One might argue as to how this windfall should. | 103 Federal Deficits and Financing the National Debt Marcia Lynn Whicker Rutgers University Newark New Jersey One of the most controversial aspects of federal budgeting is the annual deficits the United States has accumulated especially during the past two decades. These deficits have contributed significantly to the growth of the national debt. By FY 1993 projected deficits were 327 billion. Total outstanding federal debt in 1992 reached 4.08 trillion more than double than the 1.83 trillion of 1985. Federal debt in 1992 was 68.2 of gross domestic product GDP the highest percentage ever since World War II and the Korean War. Net interest on the debt was 199.4 billion.1 Federal deficits then have driven accumulated national debt to unprecedented levels. Why have deficits grown and persisted Few argue that massive federal deficits are good rather controversy surrounds exactly how bad federal deficits are and what to do about them. Policy makers agree that something should be done but disagree on what solutions should be embraced. Observers agree however that federal deficits have been rising despite all efforts to abate or even just ameliorate their growth. Plausible methods of reducing the deficit all create political pain and thus are controversial. WHY DEFICITS HAVE GROWN Federal deficits have mounted despite the efforts of policy makers to curb them. Critics contend that the budget and spending are out of control. So why have deficits mounted and persisted across the past two decades Several factors are at work including the following. Budgets Have Dual Stabilization and Allocation Functions that May Conflict Budgets are used to implement both economic policy goals and specific program needs. This dual purpose of budgets undercuts deficit reduction.2 Sometimes the goal of stabilizing the economy by reducing deficits interest paid and debt may contradict allocation goals of increasing federal spending for desirable social and defense goals. Reprinted from Handbook
