American Recovery and Reinvestment Act authorized an additional $787 billion. These expenses and more to come will add significantly to the public debt.
CONSEQUENCES OF THE DEFICIT
The consequences of operating the federal government with such a high deficit are unclear. Some policy makers view this as dangerous to long-term economic health, whereas others consider it a fact of life for a large government. When the federal budget is decreased, resources for government programs are also decreased. As long as people will still invest in the government by purchasing securities, there is a cycle of transferring money from the public to the government and back again. Because there has never before been a time in history when the dollar amount of the total federal debt was so large, there is no precedent for interpreting the long-term impact of such a large deficit. It remains to be seen whether the cycle has be-come stable or whether economic distress will be the outcome of such an imbalance.
Contentious political debate surrounds deficit reduction. Although both the president and Congress agree that the budget must be balanced and the debt re-duced, there is little consensus on how to accomplish this goal. Even when there was a surplus, Congress and the president did not produce budget plans that would save money for the future (Pianin, 2000). President Bush sent Congress budgets that simultaneously decreased taxes and increased expenditures, particularly de-fense expenditures. Between 2000 and 2004, tax revenues fell 76 percent, in part because of the recession and in part because of tax cuts proposed by President Bush and enacted by Congress (Center on Budget and Policy Priorities, 2004). With the decrease in revenues and increase in defense spending, the deficit soared. The impossible combination of tax cuts and increased spending has left the long-term problem of the deficit and public debt unresolved. Movement from deficit to surplus back to deficit demonstrates the unpredictability of economic conditions and, hence, the difficulty in controlling economic policy. Federal spending also pro-vokes debate concerning the optimal size of government. Box 9.11 summarizes this conflict.
BUDGET PRIORITIES
The federal budget is in itself a social welfare policy. Each year, as Congress and the president debate the budget and work toward enactment of annual budget legislation, policy choices and options are discussed. How we spend our budget reflects national priorities and consequently shifts over time. Box 9.12 lists the main categories of spending in fiscal year 2007. Over half the budget went to cover Social Security, Medicare, and national defense. Interest on the debt required 9 per-cent of the national budget. Where do federal revenues come from? Most federal money comes from the personal income tax and social insurance retirement and health care taxes. For fiscal year 2006, 39 percent of the federal income came from personal income taxes; 32 percent from Social Security, Medicare, and other retirement taxes; 13 percent from corporate income taxes; and seven percent from excise, estate, and other miscellaneous taxes. Nine percent was borrowed to cover the deficit (Internal Revenue Service, 2008).