Once upon a time, there was a country that spent too much.
This country had the largest economy on the planet and took in trillions of
dollars from its citizens in taxes, but every year it went deeper into debt
because it always spent more than it took in. The overspending created a
monster called “the national
debt.” This went on for years and years and both of the ruling groups
pretended to care about the overspending, but no one ever did anything about
For years, the federal
budget deficit was relatively small and only caused the national debt to
grow a little every year. Even then people worried about both. Then, about 40
years ago, the deficit got bigger and the national debt started growing by
leaps and bounds.
Things really got bad after an enemy attacked the country.
The government had to borrow money to fight the evil people that had murdered
thousands of its citizens. The war lasted a long time and the national debt had
doubled in short order.
As the threat of war receded, the country went into a financial
crisis. The country’s new leader decided that the answer was to throw money at
the problem. His spending increases caused the largest deficits that anyone had
ever seen and pretty soon the national debt had doubled again.
After the financial crisis, a brave knight came to the king
and said that spending was at dangerous levels. When the knight confronted the king,
they finally were able to come to an agreement that cut spending for the first
time in the reigns of many, many leaders.
But, alas, the spending cuts didn’t last long. And the knights never slayed the deficit. They only made it smaller for a little while. Pretty soon, both the deficit and the debt started growing again.
A new king soon came to power and, despite the fact that
there was no war or financial crisis, the new king quickly grew the deficit back
to levels that it had only seen during national emergencies under the old
kings. The national debt looked like it might double again during the new king’s
reign but this time no one was worried. In fact, one of the knights who had
fought the deficit years before now said that no one had ever really worried
about the deficit at all!
I wish I could say that this story has a happy ending where “they
all lived happily ever after,” but obviously this is not true. This story doesn’t
have an ending yet and this year the deficit monster is going to be as big as ever,
feeding the national debt to levels that are unprecedented during peacetime with
a good economy.
The sad truth for Americans is that the Republicans who
valiantly fought the deficit during the Obama years, now don’t seem to care about
it. While most Republicans are merely silent about the deficit, which will exceed
$1 trillion this year, the highest point since 2012, none other than Rush
Limbaugh has now embraced the once-liberal position that deficits don’t
Responding to a caller last month who argued that President
Trump was not a “fiscal conservative,” Rush responded, “Nobody is a fiscal
conservative anymore. All this talk about concern for the deficit and the
budget has been bogus for as long as it’s been around.”
Rush is wrong. There are many of us who are still fiscal
conservatives and whose concerns about the deficit were genuine from the beginning.
We may not hold office, but we do vote.
The unpleasant truth for Republicans is that Donald Trump is
worse on the deficit than either Barack Obama or George W. Bush or any prior
president. Trump’s deficit is going to rival the worst years of Barack Obama
and be worse than that of any other president. This is without the excuse of a
war or the Keynesian excuse of needing deficit spending to overcome a financial
crisis. In the US today, deficit spending is the rule regardless of what is
happening in the economy or the rest of the world.
To be fair, Donald Trump did inherit much of the mess. The
largest part of the deficit is driven by mandatory spending on entitlements that
Congress and the president don’t control on an annual basis. In the 2019
federal budget, Social Security, Medicare, unemployment, and health
spending account for more than 60 percent of federal spending. In contrast,
defense spending (including veteran’s benefits) makes up only 20 percent. Interest
on the federal debt accounts for almost six percent by itself.
But Trump has made the problem worse. Under President Trump, federal
spending reached a record high. This is partly due to increases in
mandatory entitlement spending, but it is also due to increases in
discretionary spending championed by Mr. Trump. Earlier this year, the president proposed
a record $4.7 trillion budget, which would increase federal spending by
almost a trillion dollars over the current year. The proposed budget cuts some
programs but includes a big increase in military spending.
The Trump Administration has also hurt the income side of
the deficit equation. Tax reform slashed corporate income tax rates, but,
despite this, tax revenues are at a record high. They are not, however, as high
as they would be in a growing economy if the tax rates had been left unchanged.
The theory is that the lower tax rates would help to grow the
economy and to some extent that has been true. The theory did not account for
President Trump’s tariff war, however. President Trump’s increases to tariff
taxes have offset the benefits of tax reform for millions of American
individuals and businesses. The higher the tariffs go, the more they are a drag
on the economy.
Mr. Trump’s economy has not yet achieved his target growth
rate of three percent per year. Despite achieving three percent growth in
several quarters, Donald Trump’s annual growth rates average worse than Barack
Obama’s. This is due in large part to his tariffs.
The best news for Republicans is that Democrats would probably
be worse on deficits and the debt. With a number of Democrats proposing giveaway
programs like free college tuition and Medicare-for-all, there is no political
home for deficit hawks. Neither party really wants to cut spending. They just
want to cut spending on the other side’s priorities so that they can shift tax
dollars to their own programs. Meanwhile, politicians on both sides of the put
on an Alfred E. Neuman grin and say, “What? Me Worry?”
The bad news for us all is that the overspending, particularly
that of Barack Obama and Donald Trump, have boosted to the national debt to 104 percent of GDP. No
one knows how such a high debt level will affect the world’s largest economy
and the holder of the world’s reserve currency.
What we do know is that the high debt level restricts the
number of tools that the Fed has to deal with future recessions and economic
problems. For example, with interest rates at near-zero, there is little room
to reduce them further to goose the economy. If the Fed raises interest rates,
the deficit will go up as the government’s interest payments on the debt
increase. The flip side is that low interest rates come at the cost of
discouraging saving and investment.
Do deficits matter? We are about to find out.