by Robert Eisner

Chapter 1: Introduction

Many people talk about deficits, usually in order to deplore them. But few can tell how they are actually measured, let alone what they mean. It is past time for an objective examination of the three presumed deficits that so frequently provoke passionate political posturing: in the federal budget, in U.S. foreign trade, and, looming ahead, in Social Security. These deficits, real or imagined, are interrelated, although no necessarily in the ways conventional wisdom envisions.

If budget deficits can change total spending, by American businesses and consumers as well as by the government, they will affect spending on foreign goods as well as domestic goods and thus have an impact on the trade deficit. If they influence output and economic growth, they will help determine contributions to and hence the alleged future deficits in the Social Security trust funds. They will also affect the resources available to support the nonworking elderly.

If trade deficits permit more domestic consumption and investment, they also increase the wherewithal to support the elderly. If they contribute to unemployment and reduce domestic output, they will increase budget deficits.

If Social Security benefits are cut back now, thus trimming the prospective trust fund deficits, reduced spending by elderly recipients may slow the economy. That in turn would diminish any budgetary savings brought about by cutting Treasury outlays for Social Security. If a commitment were made now to make benefits less generous in the future, and if people now working took this into account—a big if—it might also reduce spending, as those who could afford to do so would try to set aside more for their old age. If this did not slow the economy—again, a big if—it might result in more aggregate saving and investment, thus contributing to future output and income in the economy as a whole.