It wasn’t all that long ago when nearly all Americans were committed to a generally balanced federal budget. Jefferson did. Jackson was. FDR was. Even Keynesians thought (as Keynes did) that it should be balanced over the business cycle. That all changed in 1960 and it’s been that way ever since as this post by Christopher DeMuth at The American Interest on a speech by Pat Moynihan in 1986 points out. Here’s a snippet:
And here was Pat’s big, singular insight. Listen again to his strange admonition which seemed to come out of the blue: “The temptation is real to use debt not as a form of investment, but a means of consumption. Far from the denial of gratification, it can, and frequently does, reflect just the opposite.†Frequently does—he is not expounding Leviticus. And now consider his sally about borrowing a trillion and throwing a party. Pat was well aware of Reagan’s robust military buildup; he supported it and wanted it to continue. But he saw that something else was afoot. The public was not restive but festive. It was, he emphasized, getting what it wanted.
The flaw in this “borrowed benefits” theory of government is that it assumes a much more prosperous United States a generation from now than is the case today—forever and ever, amen. It assumes that Americans will be better able to pay in 25 years than they are now.
Are those still good assumptions?
As I have said before, I think we can run small deficits for a very long time without dire economic effects. The problem is that isn’t the case now and is unlikely to become the case for the foreseeable future. Also note than “can” and “should” are two different things. I think we should balance the federal budget over the business cycle but the Congress is incapable of that sort of restraint. I also think that the reduction of deadweight loss is a better fiscal strategy than tax cuts but that’s the fodder of a different post.
Not sure how he targets 1960 as the beginning date. Looks t debt as a percentage of GDP and it decreases every year from 1960 until the 70s. It bottoms in August of 1981 and then heads up except for that brief period in the late 90s. Aside from his (failed) effort to try to defend Reagan, he is sort of on the right track.
I think what really happened is the Republicans learned they could win elections by cutting taxes while also increasing spending (while talking about wanting smaller government). There is always a constituency for cutting taxes. Everyone likes having more money in their pocket. There are always constituencies for spending more government money. Defense contractors, welfare advocates, health care, education, etc. Both will gain you some votes. On the other side if you raise taxes you risk losing votes. If you cut programs you risk losing some votes. So from an electoral POV, the best of all possible worlds is to cut taxes and maintain programs, or even better increase spending. The end result is electoral victory.
This certainly provide “borrowed benefits”, but even worse there is the perception that these are painless benefits. There is no political cost to increasing the debt, at least to date. Remember Cheney? He understood this.
“Was Dick Cheney right about deficits? In 2002, a month before he gave George W. Bush’s first treasury secretary, Paul O’Neill, the news that he was fired, then-Vice President Dick Cheney is supposed to have told O’Neill, “You know, Paul, Reagan proved deficits don’t matter. We won the midterms.” Cheney was not making an economic case that deficits don’t matter. He was making a political case, with his reference to the midterm elections of 2002.”
Steve
“Are those still good assumptions?â€
They have been, at least relatively, good assumptions. However they are running up against a demographic dislocation and the fundamental concept of debt capacity.
Steve’s partisan nonsense aside, we have run deficits since about 1960. The so called Clinton balanced budget was accounting gimmickry and a bubble.
I don’t know how long we can go. But I fear we are getting close to critical mass. Trump knows one thing, if not academically, but intuitively, the economy needs to run like mad. Democrats and corporatist Republicans seem still stuck in free beer for everyone, and the resulting economic sluggishness be damned. It’s suicidal, and will harm many.
In a few years, the annual interest payment on the accumulated debt will be the largest single item in the budget. And that is true even if our present very low interest rate regime continues.
Then there are the social security and medicare trust funds, neither of which will be collecting enough tax revenue to support retiree benefits. Those shortfalls will have to be made up from general revenues or borrowing.
The interest on the debt and social spending will gradually squeeze out everything else. If the Democrats come to power and nationalize medicine, there will be a further massive increase in spending and further increases in our already enormous borrowing and debt.
Now throw in a large shooting war in the Middle East, which seems to be approaching quickly, and we are looking at fiscal and economic collapse.
Debt and deficits (by calculation) since 1929.
https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287
We ran deficits before 1060, and they were trending up. Starting in 1960 we had small increases (1%-2%) in debt but GDP was growing fast enough that as percentage of GDP our debt was shrinking. It is not until 1980 that you see the large increases in our deficits.
“accounting gimmickry and a bubble.”
Describes the entire Bush economy doesn’t it?
“Trump knows one thing, if not academically, but intuitively, the economy needs to run like mad. ”
Even by jacking up our debt again he still couldn’t reach 3% GDP growth. When are all the tax cuts and deregulation and new trade deals going to give us that growth? Will it be enough to offset the debt he is adding?
Steve
I think that Moynihan was commenting on a change in attitude during the Kennedy and then the Johnson administrations that culminated in the large deficits of the Reagan administration.
I think that for Republicans tax cuts are now an all-healing talisman. I disagreed with both Bush’s and Trump’s cut in the personal income tax but agreed with Trump’s cut in the corporate income tax, thinking it should have been greater.
Today with so much income concentrated in the hands of the highest income earners IMO it will be difficult if not impossible to cut personal income taxes more. What is needed, as I have been saying for some time, is prudent stewardship. Not less government or more government but better, more prudent government.
I should also mention that I find the bidding war going on among the Democratic candidates alarming.