The government’s budget should be balanced, just like a family’s. Right?
Many people look at it that way. Ever since Keynes suggested that the government run a deficit in lean times and a surplus in good times, people have railed on the government for failing to run a surplus when the economy is strong.
But running a surplus means keeping taxes higher than are needed to support current spending. And running a surplus is not like saving for retirement.
Unlike individuals, governments don’t retire. Since the economy grows based on productivity and labor-force growth, a steady, modest amount of borrowing can improve the quality of that growth. One economist has estimated that the optimal deficit is about 1% of the economy.
Looked at this way, the budget should fluctuate on either side of this optimal level. This will stabilize the economy in the hard times, and take a little spike out of the punch bowl when the party gets too hot. And we don’t see the tax man robbing Peter to pay for Paul’s rainy day.
Douglas R. Tengdin, CFA
Chief Investment Officer
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