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August 06, 2007

Is the deficit no longer a problem?

In recent years the federal deficit has been cut in half to around $200 billion today. While this figure seems high, some say the deficit is no longer a problem. N.C. State University economist Mike Walden explains why.

"First of all ... whenever we talk about the deficit, we have to contrast it to the national debt," says Dr. Walden, a professor of agricultural and resource economics. "The deficit is what we are adding to the national debt -- the extra we are borrowing each year. The debt, of course, is the total amount that we have borrowed in the past and haven't paid off.

"Now we are not talking about reducing the debt: We are talking about that annual increase to the debt," he continues. "It has been cut in half in the last couple of years. It's now around $200 billion.

"Now of course that's a big number to anyone, but when you have such big numbers -- when you are talking about economywide numbers -- the best thing that you can do to put it in perspective is to look at it as a percent of national income," Walden explains. "And at $200 billion, the deficit right now is 1.5 percent.

"And many economists think that is a sustainable amount," he says. In other words, it's an amount we can add to each year without harming the economy.

"The reason the deficit has been coming down is because we are in the sweet spot, if you will, of the economy. We are growing. Interest rates are very affordable. And that's helped particularly tax revenue grow tremendously for the federal government.

"So I think as long as the economy grows, the deficit is going to remain low," he concludes. "But look out: Next time we have a slowdown or a recession we'll likely see the deficit rise again."

Posted by deeshore at August 6, 2007 08:00 AM