What happens when the government runs a surplus?

When the federal government runs a surplus - spending less than it collects in taxes - it drains net financial assets from the private sector. The dollars taxed away exceed the dollars spent back, leaving the private sector with fewer dollars overall.

This can have significant economic consequences. To maintain their spending, households and businesses must either reduce their savings or borrow more. If the private sector was already in a financially fragile position, a government surplus can push it over the edge into recession.

Historically, this pattern holds up remarkably well. The United States has had six significant periods of budget surplus, and each was followed by one of the six depressions in American history (including the Great Depression). The Clinton surpluses of the late 1990s were followed by the 2001 recession. This isn't coincidence - surpluses drain the financial resources that the private sector needs to function.

This doesn't mean surpluses are always bad - if the private sector is spending beyond the economy's capacity and inflation is rising, a surplus can help cool things down. But the idea that surpluses are inherently virtuous and we should always aim for them is not supported by either theory or history.