Transcript
WILLIAM GALE: I'm going to focus on the budget outlook. There's been a huge amount of doom and gloom put forth in discussing the budget outlook, so I'd like to start on a positive note. And that is that the huge deficits that we're seeing this year and next year are not that big of a deal from an economic perspective. And the way to see that is to do a little thought experiment. And that is, suppose that starting in 2006, under realistic assumptions, the forecast showed that we had budget surpluses as far as the eye could see, and they were growing over time and they were cautiously estimated, et cetera. Under those circumstances, no one would care about what the budget deficit is right now or in 2004 or 2005. That is, the short-term budget deficit is not the issue. The issue is the medium- and the long-term budget deficit.
We, of course, don't have surpluses coming as far as the eye can see; we have exactly the opposite. We have ever-increasing budget deficits as far as the eye can see under reasonable estimates, reasonable forecasts.
So although the $500 billion deficit that might occur next year or the $400-some billion deficit that is occurring this year is getting all the attention, it's not the real issue. The real issue is the medium and long term. And the reason why is because of how budget deficits work. What a budget deficit does is raise current aggregate spending and therefore reduce current aggregate saving. If you're in a short-term slack economy, where businesses are not using their existing capacity, then you want to boost aggregate demand. That will encourage people to spend, which will encourage businesses to employ the machines they already have, hire workers that they've laid off or that were laid off somewhere else, et cetera. So in the short run, if you have a slack economy and you need a stimulus, a deficit can help in that regard.
But for the same reason that deficits work positively in the short run, they work negatively in the long run. And that is, in the long run, the problem is not use of existing capacity, it's increasing the amount of capacity—the capital, the skills, the investments that the economy has. And by reducing national saving, budget deficits reduce the amount that America as a nation invests in increasing its capacity. So you should think of budget deficits, as our colleague Charlie Schultz once said, as "termites in the woodwork" gnawing away at the economic growth prospects of the country, not as "the wolf at the door" that's going to cause some immediate crisis.
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