Why trillion-dollar deficits could be the new normal

Why trillion-dollar deficits could be the new normal
Image: Parker Brothers

[Ed. – Debtor nation]

Trillion-dollar deficits are coming back to Washington, and this time they could be here to stay.

In 2009, deficits swelled after the economy contracted sharply. Unemployment soared, revenues plunged and the government boosted spending to cushion the shock. Deficits reached nearly $1.5 trillion, or 10% of gross domestic product. They didn’t fall below $1 trillion until 2013, when growth improved and policy makers approved tax increases and spending curbs.

What’s different about the current situation: The economy is humming. Output expanded at a 3.1% annual rate during the first half of the year.

Federal spending is outpacing revenues, however, because Congress and President Trump approved measures to cut taxes last year and boost outlays earlier this year.

Deficits are helping to boost growth by pumping money into the economy, but they could come with long-run costs. Buyers of government debt could demand higher yields to soak up the supply of bonds issued, constraining growth in the future. Moreover big deficits during good times could leave the government constrained of resources to support the economy during the next downturn.

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