|WHY BALANCE THE BUDGET?|
August 8, 1997
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in this forum:
What's the difference between the deficit and the national debt? Should domestic spending be considered as "investments?" How does the deficit relate to the $300 million interest payment? Is balancing the budget short-sighted? Will a balanced budget reduce interest rates? Does the budget deal include a plan to reduce the national debt? Viewer comments on a federal balanced budget
July 29, 1997:
A background report and debate on the budget deal struck by Congress and the White House.
June 26, 1997:
The Senate works on finishing touches for the budget reconciliation.
June 10, 1997:
Rep. Bill Archer and Treasury Secretary Robert Rubin discuss the budget negotiations.
May 22, 1997:
The Senate works through numerous amendments on its way to a balanced budget deal.
May 2, 1997:
Congress and the President make a deal to balance the budget by 2002.
February 26, 1997:
The Republican Balanced Budget bill is rejected by the Senate, overturned by one vote.
February 7, 1997:
Office of Management and Budget Director, Franklin Raines, and Sen. Pete Domenici (R-N.M.), debate President Clinton's budget proposal.
January 30, 1997:
The NewsHour historians look at the history of bipartisanship.
Browse the NewsHour's coverage of the Budget
Browse past Shields and Gigot debates.
The Office of Management and Budget has placed President Clinton's FY 1998 Federal Budget request on the Internet.
John F. Stolte of DeKalb, IL, asks:
Dear Mr. Solman,
Somewhere along the way, I heard or read that balancing the budget would lead to a substantial drop in various interest rates. Is this result likely, and, if so, why?
Paul Solman of WGBH-Boston responds:
Dear Mr. Stolte,
The argument is that when the U.S. government has to borrow money to cover an annual deficit, it drives up the "price" of money; that is, the interest rate of borrowing it. The idea behind this is that money is like any other good: if the U.S. government adds to the DEMAND for it, (all else equal) its price (the interest rate) will go up. Therefore, if the U.S. runs a lower deficit (or no deficit at all), then it will need to borrow less, which will translate into LESS demand for money, thus lowering its price, i.e., the interest rate.
Now, a question for YOU: suppose the U.S. government ran a SURPLUS. According to this conventional wisdom, what would happen to interest rates? (Pause a moment to consider before reading on.)
Well, then the U.S. government would begin PAYING DOWN its cumulative national debt. As lenders were paid back their loans, they'd have extra money to lend to others. That would mean a greater SUPPLY of money to lend. And when SUPPLY goes UP, then price goes down, meaning, in this case, a drop in the interest rate.
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