Do Deficits Matter?

"Deficits don't matter." -- Dick Cheney

   Many folks claim difficulty understanding economics, but that's partly the fault of teachers who rely heavily on abstract numbers to explain arcane theories. Except that the theories are neither abstract nor arcane. They deal with the study of what people do with the resources available to them.
   Granted, some resources are not as readily available as others, but that too is part of the study.
   Consider the concept of deficit spending by government. For a long time, conservative politicians touted the notion that balanced budgets are the only way to run a government. Now we hear that any loss from that strategy can be made up by tax reductions, which will increase production, which will boost purchasing, which will hike tax revenue, and as the change trickles down through the economy, everyone is better off.
   Say what?

   It sounds wonderful, except when reality steps in and points out that things don't work that way.
   The government just reported that the budget deficit for the fiscal year just ended was $779 billion, a 17 percent increase from the year before. Experts attributed that change to tax cuts that ate into government revenue.
   But it doesn't matter, Republicans are fond of saying now, and that's a major turnaround from their historical position that insisted on a balanced budget.
   However, consider this: When you decrease revenue and increase spending, eventually you go broke.
   Granted, it's harder for a nation to go bankrupt, since it can stall the problem by printing more money. But inflating the amount of cash in the economy only leads to higher costs, as prices rise to absorb the amount of money available.
   And if wages don't keep pace with prices, the result is poverty.
   Eventually, the problem catches up to society as inflation soars to uncontrollable levels.
   A nation's central bank, however -- in America that's the Federal Reserve -- tries to keep inflation under control. That is, to keep it within a  acceptable level. But what is an "acceptable" level?
   That is the question that puzzles the experts almost daily. The Fed has settled on approximately 2 percent, and the agency tries to reach this target by controlling the supply of money in circulation. With less money available, prices cannot rise as fast, and wages are more likely to enable workers to stay within reach of buying stuff.
   However, when business feels free to boost prices to increase profits, even as they trim expenses by stifling wage growth, soon enough, someone will suffer.
   And on a government level, cutting taxes to encourage corporate profit really amounts to reducing government revenue. But if government increases spending -- on the military, for instance, while it cuts social welfare expenditures -- soon enough, there will be problems.
   Rationalizing that policy by endorsing the "trickle down" theory may sound good, but that's what rationalizing often does.
   Reality, however, has a way stepping in when you least expect it. It may take a while, but it will happen.