Why is Fiscal Responsibility Important?

 

Why is Fiscal Responsibility Important?

The symbol of Financial responsibility is an American, a patriot standing watch over a small child. This symbol reflects our belief that fiscal responsibility is as much of a moral duty as it is an economic concern. As the founding fathers put it, "The bond between parent and child is nature's strongest. Providing for the well-being of the young is how every generation of Americans undertook their stewardship."
Fiscal responsibility is essential to creating a better, stronger, more prosperous nation for the next generation. The choices we make today -- or fail to make -- will determine what kind of future our children and grandchildren inherit 20 and 40 years from now.
The nation's economic future and fiscal responsibility are directly linked. There is a tie between budget deficits today and what society can enjoy tomorrow. Eliminating the deficit is an important first step. The larger challenge, however, is to reform our age-related entitlement programs, which are projected to grow at an unsustainable rate as the population ages. Facing up to both the short and long-term fiscal challenges will help put the nation on a path to lasting prosperity and a rising standard of living. If, on the other hand, we fail to quickly address the growing imbalance between federal commitments and available revenues, we will squander the only opportunity to get our finances in order before the aging of America makes our fiscal situation far more difficult. Doing so would be to ignore every principle of public finance, generational equity, and long-term economic stewardship.
Deficits matter.
Federal Reserve Board Governor explained the connection between deficits and the future economy at a Coalition policy forum in June 2004:

"Fiscal policy can have important long-run effects on the health of the economy, particularly through its impact on national saving and the growth of productivity. National savings can be generated privately, by households and business, or publicly, by government. Although fiscal policy can, in theory, help boost private saving, this has proven difficult, in practice. Instead, the most important effect of fiscal policy on national saving has been through the direct government budget. When the government runs deficits, it siphons off private savings (reducing national saving), leaving less available for capital investment. With less capital investment, less new equipment is provided to workers, and, all else being equal, future productivity growth rates and levels are lower."

Because there are only so many hours in each day, the principal way Americans can increase their standard of living is if each worker becomes more productive: produces more and better goods and services for each hour worked. This phenomenon is especially important when labor force growth slows -- as we expect to happen because of demographic changes in our society like the aging of the baby boom generation and declining birthrates.

For workers to become more productive, investments must be made in education and training; in modernized plants, equipment, and productive techniques; in new discoveries and innovations; and in transportation, communications, and other infrastructure.

To make these investments, there must be a pool of savings that can be used for this purpose. Historically, the United States has had a particularly low rate of private savings, but, what is worse, the federal government's deficit is financed by soaking up much of the savings we do manage to put away. When the government spends more money than it has, it borrows the rest. Most of the money borrowed comes from private savings.

If deficits are financed by borrowing from domestic lenders, the economy will have less money available for investing here at home in the building blocks of our economic future. If they are financed by foreigners, we will owe a mushrooming debt to the rest of the world, with growing interest costs that must be serviced every year.

As Fed Governor summed up in his 2004 Coalition speech,

"Productivity growth is the principal source of improvement in economic well-being. The faster productivity increases over time, the more rapidly living standards increase. Maintaining a rapid rate of trend productivity growth is particularly important in light of the coming budgetary pressures associated with the retirement of the baby boom generation. A more productive economy will ease the financing of Social Security and Medicare benefits for tomorrow's retirees without placing an undue burden on tomorrow's workers. In contrast, if we allow debt to build now and in coming years, we will have both lower output to meet future obligations as well as the added burden of financing a growing amount of debt. Indeed, under numerous scenarios, our current debt path is unsustainable: Without changes to taxes or spending, we may reach a point where ever-larger amounts of debt must be issued to pay ever-larger interest charges. "To be sure, budget deficits are not always inappropriate, and to a certain extent, the recent fiscal deficits have helped limit the recent economic slowdown. But now that the recovery is well under way, it is important to concentrate on longer-run fiscal policy. Specifically, it is time to bring the budget deficits under control."

Solving the deficit problem does not automatically guarantee a rosy economic future. Other developments are needed to complement a balanced budget: reduced consumption, increasing savings and investment, continued improvements in productivity, improved education, inflation and interest rates at desirable levels, and a favorable worldwide economic climate. But unless we get our deficit problem behind us, we will remain unable to take advantage of these other necessary economic ingredients.
We cannot ignore the consequences of deficits much longer. Growing commitments made by one generation to the next cannot be honored on empty pocketbooks. A stagnant long-term economy cannot support retirement payments, medical care, and all the other benefits and services we would like. And it cannot support economic opportunity for today's youth to live as well as their parents' generation.
Massive federal budget deficits threaten our economy in other ways as well. They increase the likelihood of re-igniting inflation by putting pressure on the government simply to print more money to pay off its debt. The more dollars are printed, the less each dollar in your wallet is worth.
As foreign ownership of our resources has grown, so has our dependence on the actions of foreign investors and governments. These entities have come to own more and more of our productive capacity. In addition, foreign investors have bought up over 40 percent of our government's debt held by the public. As foreign holding of U.S. debt grows, so will U.S. interest payments to foreign nationals.
Huge, continual deficits strangle the ability of even a nation as rich as ours to respond when emergencies arise or when new opportunities or problems emerge, including recession. With our government deep in debt and continuing to run huge deficits, we may find it impossible to shoulder new responsibilities.
Ultimately, the choice rests with us. We can demand that our leaders undertake the kinds of reforms, including long-term entitlement reforms, that are needed to put the budget on a sustainable trajectory -- and face up to the required sacrifice. Or we can continue to pretend that our choices have no consequences -- and let our children pay the price in lost opportunities, lower living standards, and a less safe and secure place in the world.