You’re right, deficits do have potential macroeconomic impacts that can negatively effect growth, especially in the long term. Here are a few reasons why:
Additional issuance of Treasury securities to finance a larger public debt may cause investors to demand higher interest rates on Treasuries. Because consumer debt products from mortgages to auto loans are benchmarked on US Treasury yields, the financing cost of consumer products like cars and homes may rise.
Economists worry that expanded federal debt will crowd out private investment. As yields on safe government debt rise, they look more attractive to investors relative to riskier corporate and other types of private debt.
A larger government debt is compounded if yields on US Treasuries rise. Current low yields on Treasuries make the large federal debt more manageable than it might otherwise be. The 10-year Treasury yield of 2.3% is quite low by historical standards. Last year, the Federal Government paid $241 billion in interest payments. By 2027, interests costs are already expected to more than triple to $768 billion — more than we will spend on national defense. Any increase in debt and Treasury yields could drive that figure substantially higher.
Of course, faster economic growth would mitigate these effects. But, if that growth doesn’t materialize to the expected extent, it would make matters substantially worse.
The question of inequality is a complicated one. A fully equal economy is likely to have less economic dynamism with adverse consequences for both the top and bottom income cohorts. The better question is how we lift incomes at the bottom at the bottom and encourage economic mobility — the ability for lower income people to become higher income people. Some inequality is inherent in that calculus.
I’d suggest that equality is a less important goal than maximizing income at the lower end and allowing the greatest possible opportunity for economic mobility. By limiting the economic rewards of work at the top in the pursuit of equality, we risk reducing economic opportunity and limiting investment that could lift the bottom. While we certainly don’t want to promote incomes at the top at the expense of incomes at the bottom, inequality is to some extent a cost of a prosperous, dynamic economy. A rising tide that lifts all boats is preferable to a stagnant economy that lifts none.