Budget Busting

  • Budget Busting
  • Is There An "Amazon Effect?"

I invested time this past weekend preparing my income tax return. I actually enjoy the exercise, as it brings me closer to our personal finances and to the details of the U.S. tax code. The early indication is that we’ll have to make an additional payment on the April 17 due date, so there is no rush to file.

There is hope that the recently enacted tax reform bill will make next year’s filing season a little more pleasant for me and many other Americans. But the likely trajectory of government debt and deficits could make future Aprils very unpleasant. U.S. fiscal policy has become unmoored, and it will be difficult to steer it safely back to shore.

The debate over U.S. government debt is as old as the country itself. The Federalization of finance was highly controversial in the early days of the republic. (Alexander Hamilton staked his reputation and a lot of his capital on the issue.) The colonies had taken on massive debt to finance the Revolutionary War, and the decision to consolidate the borrowing was a risky bet on the future of the nation. Fortunately, it paid off.

For a long while thereafter, the Federal government typically ran deficits only during times of economic or military challenge. Accumulated indebtedness subsequently fell back during expansions and peace time.

That pattern began to change at the beginning of the 1980s. During the Reagan administration, the military budget was expanded in an effort to end the Cold War. The supply-side economists advising the President asserted that deficits didn’t matter, if they were used to help the economy to grow. The economy did indeed grow during that decade, but so did budget shortfalls.

At about the same time, shifts in demographics meant the costs of Great Society programs like Social Security, Medicaid and Medicare began to grow more rapidly. Today, the three programs account for almost 50% of all Federal spending. And because the Federal budget is in deficit, some share of the interest on the national debt might be attributed to these entitlements.

The pattern of reducing debt during strong economic times was interrupted by the tax cuts implemented in the early 2000s. The rationale given was that budget surpluses belonged to the people, and should be remanded. Unfortunately, the government had been accumulating debts that also belong to all of us.

When the Great Recession hit, there was bipartisan support for using fiscal policy to put a floor under the worst economic shock in 70 years. Fortunately, an improving economy began producing additional revenue for the Treasury. On the spending side, Congress instituted automatic budget cuts in 2013. Together, these developments brought the annual deficit down to a low of 2.4% of gross domestic product (GDP) in 2015. Fiscal conservatives (like the members of the Tea Party) promised to push for budget balance and beyond.

That austere spirit seems like a distant memory. Since December, Congress passed the biggest tax reduction in history and spending increases of $300 billion over the next two years. Peacetime stimulus of this magnitude when the economy is operating at full employment is unprecedented.