As I send this book to the press the deficit appears to be vanishing
and budget surpluses are currently projected for the next several years,
to be followed, however, by huge deficits again when the baby boomers
begin to retire around 2010. A deficit is simply a negative surplus, so
the ideas developed here apply to both; that is, increasing the deficit has
the same impact on the economy as reducing the surplus. No matter
what the projections are--and they change constantly--we need a ra-
tional understanding of how the deficit and the surplus are related to our
economic health. The goal of this book is to promote this understanding.

Many people have only the fuzziest of idea what the deficit is and
how it is related to the public debt.

Whenever the government spends more than it collects in taxes, it
must borrow the difference. The deficit is the amount borrowed. The
government borrows by selling securities (e.g., Treasury bills) to the
public. ¹ In buying these securities, the public is lending money to the
government.

The stock of government securities held by the public is called the
public (or national) debt. Every year that the government runs a deficit,
the public debt increases by the amount of the deficit.

Conversely, every year the government runs a surplus--that is, spends
less than it collects in taxes--the public debt decreases by the amount
of the surplus. A surplus means the government is channeling its excess
taxes to the private sector by retiring the public debt.

Do you have a debt? A mortgage, say, or a car loan? Is your debt
"big"? That depends on your ability to meet the payments. If you're
carrying a $100,000 mortgage on an income of $75,000 a year, your debt
may not seem very large. But if your income were to drop from $100,000
to $25,000, the same mortgage might become a strain.

A similar logic applies to the public debt. Just as your debt is backed
by your income, the public debt is backed by the nation's income. The
usual measure of the burden of the debt is the ratio of the debt to national
income. The most common measure of national income is the gross
domestic product (GDP), which is the total value of output (and income)
produced in the United States. ² In 1995 the GDP was about $7.2 trillion,

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