Deficit and debt hawks had much to crow about this past week, echoing concerns I’ve received from many readers.
The federal deficit is set to blow past $3.8 trillion this year — and that’s without further stimulus/disaster relief spending because of the COVID-19 pandemic.
I’m old enough to remember when we ran a surplus, in 2000.
Meanwhile, the national debt is increasing to levels not seen since the end of World War II, according to the Committee for a Responsible Federal Budget, a bipartisan public policy organization that focuses on fiscal issues.
The red ink and debt are unsurprising given the magnitude of the national public health emergency. But what deserves examination is whether this severe imbalance was necessary, how much it will drag on the economy — or whether it matters at all.
Before we go further, let’s define. The deficit or surplus is the difference between what the federal government spends and takes in during a fiscal year. The national debt is the total borrowing carried by the federal government. One might be roughly compared to how much you overspent this week; the other is your total credit card and mortgage debt.
The debt was one of the brilliant achievements of Alexander Hamilton, the first Treasury Secretary. It attracted investors to the new federal government. The one time the debt was paid off, under President Andrew Jackson, calamity ensued when the economy faltered. The United States had been frozen out of world capital markets.
Now get out your umbrella for the bucket-full of numbers about to be poured on you:
Since record-keeping began in 1901, the federal government ran either balanced budgets or relatively small deficits — even during the Depression and World War II — by comparison with what began in the mid-1970s.
Then, President Ronald Reagan oversaw the red ink growing from around $79 billion in 1981 to $290 billion in 1992 (with President George H.W. Bush). This was a result of tax cuts and heavy defense spending.
President Clinton ended his two terms with a large surplus. This was thanks to a roaring economy and modest tax increases.
In the 2000s, President George W. Bush’s tax cuts and wars drove the deficit to new highs, which were topped by the Great Recession. That downturn forced more deficit spending to fend off a second Great Depression. The deficit came down until 2015, when it began rising again even before the pandemic crisis.
Recently, the deficit increased despite the longest economic expansion on record.
As to the national debt, it was 120% of gross domestic product in 1946, falling to around 31% for much of the 1970s.
The debt started climbing in the 1980s, topping out at 64% of GDP in 1995 before falling again. After the Great Recession, debt climbed above 100% of GDP in 2016. Since then it’s risen slightly higher, to $23 trillion as of last year.
And this was before the $2.35 trillion pandemic rescue package. (Add in the Federal Reserve’s efforts and the rescue’s total cost is around $6 trillion).
We reached this fiscal condition mainly because of the Republican fetish for tax cuts, the cost of continuing wars and President Donald Trump’s tardy and bungled response to the pandemic, documented in painful detail by the New York Times.
Then-Vice President Dick Cheney said in 2003 that “Reagan proved deficits don’t matter.” Maybe. Republicans are only deficit hawks when they’re out of power. But even as of 2019, when the economy was still expanding, we rarely faced a deficit that large.
Classic Keynesian economics states that governments should run deficits to offset downturns, then move back toward balanced budgets when the business cycle turns up again. We’re a long way from that aspiration, especially because of Trump’s insistence on tax cuts for the wealthy and corporations. This set the table for even more red ink in the crisis.
As for the debt, retired Seattle economist Dick Conway told me, “A large federal debt poses several potential problems. If left unchecked, the debt could unduly burden future generations of Americans, reducing their standard of living. Public borrowing can ‘crowd out’ investment in private capital and slow the growth of the economy.”
It also matters how federal borrowing is used. The 1946 debt represented the cost of defeating the Nazis and Japanese militarism, funding the “Arsenal of Democracy.” We didn’t so much repay the debt as grow our way out of it with the robust post-war expansion.
In a theoretical world, borrowing — especially at the low interest rates of recent years — could have been invested in high-speed rail, advanced industries, research and education. Those investments would have returned more than their costs in the years ahead, as happened with New Deal infrastructure.
Instead, recent borrowing widened income inequality and gave corporations the money for share buybacks.
To be sure, the United States enjoys unique advantages. The dollar is the world’s reserve currency and Treasury bonds are the No. 1 safe choice for investors. That’s the equivalent of a gold card with an unlimited balance.
This depends on the historic “full faith and credit” of the federal government, including the planet’s largest economy and stable, prudent leadership constructively engaged with, and leading, the world.
Trump’s norm-breaking presidency has raised questions about whether this is trustworthy. As a candidate, Trump made incoherent statements on renegotiating the debt, which unnerved investors.
Earlier this month, Trump ally Sen. Lindsey Graham astonishingly threatened to “cancel” some of our national debt held by China, as punishment for the pandemic.
If implemented, such moves would gradually — or instantly — destroy America’s “safe haven” benefits. They’re unthinkable. But so was Trump’s victory in 2016 (unless one looked closely at how American elections are really settled: the Electoral College).
For now, every country is expanding its debt to address the crisis, while the G20 leading economies have suspended debt payments from the poorest nations. The world is awash with debt of all kinds, and it’s a risky situation.
But we’re not facing runaway inflation like early 1920s Germany, as some readers fear. Deflation is the bigger danger because of the economic shutdown. Debt-hawk austerity would be ruinous both during the crisis and in the long way out.