“Deficits don't matter,” Vice President Cheney once remarked (Suskind 2004, 291). They are a “threat,” warned Alan Greenspan. In stating these very different views, one thing the two men probably had in common was confidence that the term “deficit” offers a meaningful measure of something.

Just what the deficit measures, and how well, is considerably less clear. As we will see more fully in Part Two of this book, the deficit is thought relevant to a number of different concerns, ranging from generational equity to easing recessions to the danger of default. As a multipurpose tool, however, it should immediately be suspect. At least a Swiss Army knife has separate attachments for each of its separate functions. The deficit, by contrast, apparently is meant to serve all of its multiple purposes at once.

To measure the deficit in its simplest form, you compare the government's cash inflows to its cash outlays for the year, disregarding any cash flows that are classified as involving debt principal. An excess of outlays is a deficit, while an excess of inflows is a budget surplus.