America enjoys unique advantages that allow the federal government to rack up red ink. But we may not be able to count on them in the future.
Earlier this year, the Congressional Budget Office released an analysis predicting annual federal budget deficits of $1 trillion by 2020, along with public debt levels not seen since World War II.
The imbalance might — emphasize might — be cause for great concern in the future. Interestingly, it’s not much of an issue in the midterm elections, aside from Democrats warning that Republicans would use the red ink as an excuse to cut social programs if they win.
That risk is real, but I’m not sure how much traction it’s getting amid the daily drenching of news and presidential tweets.
First, some definitions. The deficit is the difference between what the federal government spends and the revenue it receives.
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The debt is the total that the federal government owes to creditors, especially those who hold Treasury securities.
I’m old enough to remember when the deficit was eliminated in the late 1990s, thanks to a modest tax increase under President Bill Clinton and a roaring economy. Analysts actually worried what might happen to Treasury bonds: Would less borrowing mean a short supply of investors’ favorite safe-and-stable place to park their cash?
I am not, however, old enough to remember the one time the federal debt was entirely paid off. That was under President Andrew Jackson. But the result was calamitous when a recession caused the need for borrowing, yet the United States was shut out of European capital markets because, essentially, it didn’t have a current credit score.
From the 1950s until the early 1980s, Washington, D.C., mostly operated close to a balanced budget. This was after America used deficit spending to combat the Great Depression and then took on mammoth debt to fight World War II.
That war also brought new revenue by broadening the tax base and raising the top marginal rate (on the wealthiest) to 94 percent. Both the Truman and Eisenhower administrations largely kept that rate in place and both the war’s debt and deficit went down.
(For this and other reasons, the radical-right John Birch Society labeled the Republican Ike, former five-star Army general and Liberator of Western Europe, “a dedicated, conscious agent of the Communist conspiracy.”)
Deficits entered the modern era under the Reagan presidency, largely because of tax cuts combined with big military spending. One might credibly argue that Reagan’s policies helped end the Cold War by spending the Soviet Union into the dustbin of history. But unlike previous conflicts, this one was on the credit card.
The same dynamic happened under President George W. Bush, with tax cuts and then wars in Afghanistan and Iraq. The results from those conflicts were less happy. Predictions that these wars would cost in excess of $6 trillion have been borne out.
President Barack Obama used heavy deficit spending to fill the hole in demand caused by the Great Recession. Such policies were mainstream, used by administrations of both parties to combat downturns.
This brought the deficit close to 10 percent of gross domestic product. By comparison, it was 27 percent at the height of World War II and around 5 percent during Reagan’s controversial spending. But the figure had eased to between 2 and 3 percent during Obama’s last years.
The comparison to GDP is a more accurate way to assess what seem to be scary raw numbers.
President Donald Trump and the Republican-controlled Congress delivered on their promise of a $1.5 trillion tax cut over the next decade, mostly for the rich and corporations.
One problem was the expanding economy didn’t need this stimulus (nor has it raised wages). The real tax rate for corporations was low before this legislation — now it’s much lower than other major countries.
But the tax revenue is gone and now serious red ink is forecast (the deficit went up in the most recent fiscal year; it usually goes down during an expansion). From the Reagan and Bush experience to that of Kansas, tax cuts don’t “pay for themselves.” Especially in the era when most economic gains go to shareholders, the rising tide doesn’t lift all boats.
The relatively good news is that America has the equivalent of the world’s best gold card, with an unlimited credit line.
The dollar is the planet’s reserve currency, most used and sought after. Treasury bonds are the main safe-haven investment, it being unthinkable that the United States would not pay its creditors.
Borrowing in its own prized currency, the government is further backstopped by the Federal Reserve. The central bank can expand the money supply or use other measures to ensure financial stability.
Deficit hawks will have none of this and can spin some terrifying scenarios, such as China stopping the purchase of Treasurys.
Such a risk is highly unlikely short of a shooting war, although Trump’s antagonism of China doesn’t help. Treasurys give Beijing financial protection. Also, if you lend me 50 bucks and I can’t pay, that’s my problem. If you lend me a trillion dollars and I can’t pay, that’s your problem.
Meanwhile, Japan has been running extremely high deficits for years without a disaster. Tokyo also borrows in its own currency.
Economics aside, deficits have been politically useful in the past. Democrats attacked Reagan and Bush over their red ink. Republicans did the same with Obama — but have been conspicuously silent about Trump’s deficit. The party of tightwad Eisenhower has changed. Vice President Dick Cheney famously said, “Reagan proved that deficits don’t matter.”
However, the GOP uses deficits to go after “entitlements” (read earned benefits) such as Social Security and Medicare. Especially at risk are these benefits for younger people, because the older Americans expecting them also vote heavily.
Democrats would prefer to cut spending on defense and raise taxes.
But the enduring deficits caused under Trump push us into uncharted territory.
Take away Social Security and Medicare, insist on increasing military spending, put us into World War II levels of deficits and continued tax cuts, and the discretionary spending available for cutting is relatively meaningless.
With these policies, this is why Americans can’t have nice things such as a stronger social-safety net, universal health care and high-speed trains common in other advanced nations.
One thing I don’t want to hear is the right complaining that the deficit and debt are a terrible burden to pass on to our grandchildren.
That pales in contrast with the burden of climate change. And, like with the federal budget, the ruling Republicans not only want to do nothing — they want to make it worse.