by Archie M. Richards, Jr., CFP^®
February 2, 2004

Deficit, deficit, deficit. The issue concerns politicians and many others. They say the deficit will never be paid off. It'll stall the recovery. It'll crowd out financial markets. It'll raise interest rates. It reflects the decline of American civilization.

Disregard all such talk. Today's federal deficit isn't even a little problem, never mind a big one. Don't let the worriers cause you to sell stocks.

Just three years ago, the government projected that the feds would enjoy a $5 trillion surplus over the ensuing 10 years.

That prediction didn't work out too well, did it?

Now the same people project that the feds will suffer a $2 trillion deficit over the next 10 years. Do you get the feeling those guys have no idea what they're talking about?

The deficit is a big dollar amount, of course. But what counts is the amount in comparison with the size of the economy. On this score, the deficit fades in significance. The economy is growing faster than the deficit, making the latter less and less of a concern.

After World War II, the deficit amounted to a huge 26 percent of the economy. No problem, the economy soared.

By 1983, the deficit was down to only 6 percent of the economy. Again the economy soared.

Now, the deficit is only 5 percent of the economy. The economy will soar yet again. It will continue growing faster than the deficit. I expect that in ten years the deficit will amount to something like 1 percent of the economy.

Federal deficits don't cause interest rates to rise. Look at the evidence: The deficit is higher than it was two decades ago, right? Yet during the same period interest rates went down like a rock.

Interest rates, you see, are set in various markets where U.S. dollars pass from lenders to borrowers. These money markets are so massive that federal borrowing alone has little effect on the rates.

The reduction of tax rates is cutting the deficit. After Treasury Secretary Andrew Mellon cut the rates back in 1921, federal revenues went up sharply. After John Kennedy cut tax rates in 1963 (the reductions were enacted after his death), federal revenues went up sharply. After Ronald Reagan cut tax rates in the early 1980s, federal revenues went up sharply. George W. Bush cut the rates last year. Federal revenues have started rising and will continue doing so.

Whatever government taxes less, the nation gets more of. When government reduces tax rates on income, people earn more income, or at least report more of it in their returns. Government revenues therefore go up, despite the lower rates. In the next few years, tax rates will probably be cut more. The sooner the better.

What hurts are huge federal expenditures. On this score, George W. has fallen down on the job. He's been spending other people's money like a drunken thief. Federal expenditures have exploded like weapons of mass destruction. Agriculture, transportation, Medicare - there's hardly a segment of American life in which Mr. Bush hasn't bought votes. Oh yes, his foreign and military policies have been well worth the higher costs. But on everything else, the huge spending increases are appalling. Someone ought to tell the guy that big government generally does more harm than good.

Homeland security wasn't supposed to cost much more on a net basis. The agencies that homeland-security functions were transferred from were supposed to reduce their costs. But they didn't. Not only did the new Department of Homeland Security cost plenty, the costs of the agencies from which its functions were withdrawn went up as well.

At least Mr. Bush says that next year's total federal budget will rise by only 1 percent. To back up that statement, how about breaking out the veto pen, Mr. President? Check the ink. It's probably gone dry.

Concerns about the deficit lower stock prices. The concerns are unfounded. Take advantage. Buy stocks.