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The goal of fiscal policy during these past years has been to reduce
the budget deficit to zero. This was the general consensus among
the Congress, the Presidency and the general public. When forecasters
first projected a federal budget surplus, the projections were accompanied
by statements that surpluses were only temporary and population
demographics would once again push the budget into deficit in the
21st century. The projections of renewed deficits have been replaced
with projections of continued surpluses and raise the issue of what
is the appropriate federal budget surplus.
Federal budget surpluses are not new. After World War I (WWI) the
federal budget surplus was used to retire the WWI debt. Retiring
the debt was the agreed-upon policy and regular debt payments were
incorporated into the budget. The Great Depression eliminated the
surpluses, and World War II, along with Keynesian economics, pushed
the budget into deficit for many years. After WWII the federal debt
was greater than the gross domestic product (GDP)--a number too
large to consider eliminating. Attention was directed toward government
deficits. If the deficits were zero or small numbers, then the total
debt would become a decreasing percentage of GDP. While we were
not successful in holding deficits to zero, nevertheless the debt
has decreased and now amounts to about half of GDP.
What should we do with the surpluses? There are those that argue
for increased expenditures. Others push for reduced taxes, and still
others want to reduce the federal debt. President Clinton has argued
that the surplus should be addressed only after the Social Security
problem is fixed. It would be appropriate to formulate a long-range
surplus policy much the same way that we focused on budget deficits.
The policy can be thought of as a tradeoff between the present and
future generations. Reducing taxes or increasing expenditures benefits
the present generation, while buying down the debt favors future
generations.
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