There's a lot of talk these days about federal budget deficits. It's an important issue, but I think a lot of people are worried about the wrong things. I'll try to present what I think is basically a consensus opinion of economists. Some economists would vociferously disagree with me, but I think most would agree with the basics of what I'm saying, though perhaps with some minor reservations.
Deficits can be a problem for various reasons, e.g. they can lead to higher interest rates, which can choke off economic growth. And they can lead people to worry that taxes are going to go up, etc. But deficits are not always and everywhere bad. I don't want to go into overly wonky territory, so let's just look at an example from everyday life. Sometimes it's ok for someone to go into debt. For example, many people take out loans to pay for college. We don't generally regard this as disastrous for the person taking out the loan, as long as there's some plausible plan to eventually repay the loan. Similarly, it's OK for the government to run a deficit, if there's some plausible plan to balance the budget eventually. The consensus among economists is that the government shouldn't try to balance the budget every year. Rather, it's better to balance the budget over the course of the business cycle: i.e. run a deficit in bad year and then run a surplus in good years. (see #8) I'm using somewhat imprecise language, and my analogy isn't perfect (after all, lenders are much more likely to tolerate fiscal profligacy on the part of the US government than they are for an individual person), but I think it's a common sense, fairly accurate way for people to think about budget deficits.
So, when people rail against Obama's stimulus for adding to the deficit, I think they have a legitimate concern, but I think they are basically misguided. It makes sense to run a budget deficit during a recession, either by lowering taxes, raising spending or both. (see #4) There are legitimate debates about how big such a stimulus should be or whether tax cuts are better than spending increases. Traditional Keynesians tend to favor spending increases. The eminent economist Robert Barro prefers tax cuts.
I think it is reasonable to think that the portion of the deficit attributable to the stimulus bill is for the most part short term and manageable. Maybe the stimulus was poorly designed, but a stimulus itself is not a bad idea. People who say things like: "The government cannot create economic growth, only businesses/entrepreneurs can" are flat-out wrong. Economic growth can come from both the public and private sectors or by some sort of combination of the two. Our short-term, huge problem is unemployment. Our long-term problem will be budget deficits. There's a time to be fiscally austere, but not when so many people are suffering and so many are desperate to get back to work.
Yes, in the long-run (say, the next few decades or so) deficits will be an enormous problem. Can we convince creditors that we are reasonably fiscally responsible in the long-run so that they will continue to trust us and lend to us? Our nation is projected to have large deficits indefinitely, largely due to Medicare, Medicaid, Social Security, and defense spending. And these deficits will eventually grow larger and larger. This is a problem that will need to be dealt with. In a few years, the stimulus bill will be but a memory, but we'll still have large deficits, as I said, mostly due to four large components of our budget. I'll discuss this in another post.
[Update: According to Mankiw, you might not need to balance the budget, just keep the deficit reasonably small relative to the economy.]