Federal deficit: problem or symptom

Everyone is getting sick of hearing the growing number every year. This year, the number is to the tune of $1.1 trillion. Or, written differently, $1,100,000,000,000. To most of us, that is a big number with a lot of zeroes which should probably be lessened. Just over a trillion dollars is about one-fifteenth the size of America’s GDP, and if it were the GDP of a country, that country would rank 14th in the world, just ahead of Mexico.

Most agree that the deficit each year has gotten out of hand. The debate is simply about how to reduce the deficit. Buried within that question lies another equally important question: Is the deficit the problem itself that must be addressed or is it a symptom of a different problem? Or, even more confusingly, is it tied to another problem?

The deficit rises and falls based on the discrepancy between government income (i.e. taxes) and expenditures. Put simply, the deficit arises from another problem to begin with—we are spending more money than we are taking in. Any financial advisor with a college degree will tell you spending more money than you pull in is not a wise idea and is a sure recipe to lose your shirt. Setting aside that annoying fact (which we like to do), is how to combat it. Obviously, going with an axe to the $1.1 trillion deficit and cutting things out of the budget does not seem a sound plan. Just over a trillion dollars is not a short amount to cut. Clearly, there is a much larger problem that needs addressing.

In much the same way that there are two ways of classifying the problem, there are two main ways to address the problem: focusing on paying off the deficit directly by gathering more funds through taxes or diverting government funds to paying it, or indirectly attacking it by changing other factors that directly affect the deficit in the economy. Most deficit reduction strategies revolve heavily around the first strategy: raising taxes and diverting funding away from necessary services to pay for the enormous overages. The problem with this strategy is that it tends to weaken as opposed to strengthen the economy. Increased taxes and decreased government spending on active services introduces a significant deadweight loss in the economy and serves to suppress supply and demand. This is counterproductive to the economy.

The best way to reduce the deficit is to create jobs. Creating jobs, besides itself being inherently beneficial to the economy, has the powerful side effect of increasing the number of workers paying taxes, which increases the absolute volume of tax dollars brought in. The tax rate could even be reduced and the total amount of tax dollars would still increase because the number of new jobs created from lowering taxes would outweigh the decrease in taxes.

If the true goal of reducing the deficit and of congress is to strengthen the economy, then taxing our way out of the deficit is not beneficial. The clear answer to the problem is to stimulate job growth to structurally fix the problem. A deficit this size indicates need for surgery, not a band-aid.