Can a $1 Trillion Budget Deficit be a Positive Event?

The federal debt has already surpassed $10 trillion, and current estimates indicate that this fiscal year's budget deficit could exceed $1 trillion. Strangely enough, even conservative-minded economists aren't balking at the spending, even though it's likely to lead to more government borrowing.

"Upside down, boy you turn me, inside out and round and round..." The global economic crisis has turned everything on its ear-so much so that economists might find themselves humming a little Diana Ross as they advise the feds to spend their way out of this mess.  

President-elect Obama never tried to win a vote by saying he wanted to go on a wild spending spree with government dollars. Franklin D. Roosevelt didn't, either. It's not a strategy that goes over well with taxpayers. FDR actually campaigned on the promise of balancing the federal budget, and then reversed his position to usher in the New Deal.  

But, as they say, there's a time and a place for everything. A growing number of economists are chiming in to argue that now may be the time for big government spending.

Deficit of historic proportions

In the fiscal year just ended, the federal deficit came in at about $455 billion. Few would disagree with the conclusion that next year's deficit is likely to be at least double that amount. A deficit of $1 trillion, if covered with government borrowing, would add almost 10 percent to the federal debt, which now stands at about $10.8 trillion.

Lesser of two evils

The usual concerns associated with excessive federal deficits are the same concerns that apply to borrowers who spend more than they make. The spending shortfalls have to be covered somehow, and usually debt is the answer. The federal government borrows money by selling bonds or writing IOUs to other programs, such as Social Security. Generally speaking, that money has to be repaid and, often, with interest. As the interest and principal repayments move ever higher, it squeezes the amount of money available for other programs.

Increasing the federal debt has its drawbacks. But, at this juncture, not increasing the federal debt could have a much scarier set of consequences. If the feds sit back and wait for the weak economy to repair itself, they could be inviting an economic meltdown on par with the Great Depression. And the cost of that scenario, in terms of lost tax revenues and increased demand for government assistance, could far outweigh the money spent now on economic stimulus.

There's another factor that also invites the government to ramp up its borrowing right now: Scared investors are pouring money into Treasury bills, which is driving effective rates down to almost zero. This trend won't last forever, but it does create a short-term opportunity for some very cheap government borrowing.

The economic crisis has turned the definition of fiscal wisdom inside out. But spending is one thing that American lawmakers know how to handle.