Debt and deficits: How much is too much?
By D. Eric Schansberg, Ph.D., and member of the Bluegrass Institute Board of Scholars
During the depths of the Great Recession, Kentuckians focused on unemployment and the ineffectiveness of fiscal “stimulus” policies. But now, as the economy has limped forward, the dominant topic is the federal budget: annual deficits, the overall debt and how much is too much.
Across the world, including in Kentucky, trouble with deficits and debt is commonplace as governments too often succumb to the political temptations of using debt (or inflation) to cover their bills.
But until recently, federal budget deficits have rarely been an important topic in the U.S.
In wartime, debt has been used as a temporary emergency measure with relatively little long-term impact. In the 1980s, the growth of domestic and military spending increased deficits to then-alarming levels. Still, deficits faded in the 1990s with the end of the Cold War and strong economic growth.
It’s only been since 2001 that tax cuts and increases in all types of spending brought big deficits back. After the financial crisis in 2007, the deficit ballooned to historic levels.
So, just how much is “too much?”
There are three ways to answer this question.