Deficits should really only be measured in terms of percent of GNP (or similar "worth-growth" number), rather than in absolute terms. If the deficit is small in terms of GNP, then it is not too dangerous. Theoretically, it is OK to have a deficit in "down" years to stimulate the economy, and then pay it back through surpluses when the economy has "up" years. Unfortunately, politicians seem to hate to ever cut program costs, so they tend to stay in place, even in "up" years (during the Clinton years, the political climate allowed surpluses because of a critical conservative opposition in congress).
The real crunch comes with accumulating debt over a number of years, such that the debt-service becomes a large percentage of the budget. Then, any up-tick in interest rates can cause a double-whammy (hitting both the economy and the debt-service portion of the budget).
The trade deficit is quite different, and should take care of itself. If foreigners are willing to sell more goods than they buy, then the value of the dollar should reflect that (going down when there is a deficit, up when there is a surplus). If foreigners are willing to "support" the dollar by accepting a currency exchange rate that does not reflect the balance of trade, fine. Eventually, however, the "correct" value will assert itself, and foreign goods (and things like European vacations) will cost too many dollars, and Americans will have no choice other then spending money at home. |
