The debt in the hands of Americans must be serviced by involuntary payments--taxes. To the extent that Americans hold the IOUs of the government debt, it's just Americans paying Americans. The problem is that while the holders of the IOUs acquired them voluntarily, the people who must pay the interest on them and pay them off (we the taxpayers) don't feel voluntary about our role. People do not pay taxes voluntarily. An unwelcome tax of $10 is not the same as a willing agreement to receive $10 in exchange for loaning money. There's an excess burden, the value of the compulsion in taxes.
Not all debt is in the hands of Americans During the 1980s foreigners bought about one fourth of newly issued Treasury bonds. Now, in 2006, the share of debt owed to foreigners is closer to 40 percent (the lion's share of that amount is owed to Chinese and Saudi Arabian governments and private investors). Interest payments to those foreigners benefit foreigners, not just another pocket of Uncle Sam. (To offset the foreign interest payments and thus maintain a current account balance Americans need to sell products abroad.)
The deficit is underestimated. For example, surplus Social Security receipts are counted under revenues while the future Social Security obligations are ignored.
Excessive government spending crowds out private spending. The implicit assumption of this argument is that private spending adds more to economic welfare than public spending.
Continuing high deficits make it harder to conduct an expansionary fiscal policy when it is really needed. The argument is Keynesian. The 1991-92 recession is the example. From a Keynesian perspective additional government spending was called for, but with the already high deficits the hands of the administration were tied.
Once there is a deficit, it's politically hard to cut it. During the 1980s the Congress tried hard, spurred on by Republican presidents. Most drastic was the Gramm-Rudman-Hollings deficit reduction law, which Congress passed in 1985. The law promised a balanced budget by 1991 and threatened automatic budget cuts if Congress failed to meet the pre-set targets. But the law left escape hatches, which Congress and the Administration quickly dove through. For example, the penalty applied only when the estimated budget deficit did not meet the target. So officials of the government and Congress come out with very optimistic estimates (high tax revenues, low interest payments) and then act surprised when the actual numbers come in. In 1987 Congress decided to amend the law. The targets were relaxed and the final date for the budget to be balanced was moved to 1994. The actual deficits have so far not come close to the targets, and the law is now off the books.
McCloskey: My public-choice friends have a solution. They propose a constitutional amendment that requires the federal government to balance its budget, just as local and state governments must do. Quite a few politicians have adopted the idea. It might mean the end of pork-barrel policies under which every politician pursues his or her own pet project.
Klamer: Bad idea. In order to maintain a completely balanced budget the government would have to cut its spending in bad times to compensate for increases in unemployment benefits and welfare payments. Just when the economy was doing badly the government would add to the troubles by canceling projects and laying off people. No, the government should have the discretion to increase spending when needed.
McCloskey: But higher deficits will not do the economy any good.
Klamer: Maybe in the long run not. In the short run, however, they may give a much needed boost.