Living On Borrowed Time

Republicans have fought for decades for balanced budgets and deficit reduction. Their Reagan era experiment with “supply-side” or “trickle-down” economics – where extra money funneled to the rich (the purported “job creators”) trickles down and lifts everyone else – failed then (and deficits rose), failed even more dramatically recently when Kansas implemented a state tax cut and failed again after the Trump administration shepherded a 35% down to 21% corporate federal tax cut. Most of that latter windfall went to share buybacks, dividends and corporate mergers and acquisitions. A tiny amount went to new jobs, most of which were not exactly at the top of the pay scale.

In fact, the real wages for 70% of Americans haven’t budged more than a percentage point in decades. The Trump tax cut may have made folks who depend on the stock market for their incomes/wealth ecstatic, all it did for the rest of the country – now that the glitz and glitter of the effort has all but vaporized into market pricing – was saddle us with the highest peacetime deficits in our history, deficits that show no sign of dissipating any time soon. Income inequality took one more giant step toward rewarding the super-rich, separating them ever farther from everyone else. Upward mobility is a barely visible memory in our nation’s rearview mirror.

As Republicans now cry for deficit reduction, as the President has sent a “dead on arrival” $4.8 trillion federal budget request to the House, reality seems to have left the building: the military gets more money, the deficit interest payments soar, but the proposal aims at cutting social programs, including Social Security and Medicare benefits, long-since earned by the people who paid into their accounts, and slamming healthcare (the federal government has now officially joined in the 20 red state litigation to terminate the Affordable Care Act) with absolutely no replacement despite pledges to the contrary. The deficit Kings – GOP – want the rich to get the benefits and the middle and lower economic classes to pay for it.

The efficacy and danger of rising deficits has been hotly debated for years. Some economists look at the strength of the US economy and tell us that deficits are very affordable. Others say that traditional economic theory requires a thoughtful “how is this going to be repaid” analysis. The old notion that you do not have to sacrifice when you fight wars – the old “guns or butter” theory – started with the Vietnam War and continued right into the present with the conflicts in Central Asia and the Middle East. Expanding a military that already accounts for 41% of the entire global military budget while cutting taxes is seen by many economists as self-defeating folly.

This economic path deprioritizes growth engines generated by investments in education, research and infrastructure. Add environmental and financial deregulation to the mix and you have the rising threat of another “too big to fail” crash combined with the obvious mega-costs that come with ignoring climate change. Thus, the emphasis on today’s blog is on the impact of our federal budget deficits on all of us. I would like to present a well-encapsulated analysis by Yale University Professor in the Practice of Finance, William B English, in the February 7^th edition of Yale Insights:

The specific deficit number is not really the thing we should be concerned about. We need a tax system that will raise the revenue over time that we need to pay for the government services we want. And it should do so in an efficient way—that is, without unduly discouraging working, saving, and investing. The non-partisan Congressional Budget Office (CBO) projects that federal spending will run about 21% of GDP over the next few years, while taxes will run under 17% of GDP. That leaves a deficit of nearly 5% of GDP each year—unprecedented for a period of such low unemployment.

While the deficit is very high, interest rates remain extraordinarily low for a range of reasons, including the aging of the American population and elevated foreign demand for U.S. assets. That’s good news because interest rates determine the cost of government borrowing. And there’s every reason to believe that interest rates will stay low for a long time to come. (Indeed, last week the CBO marked down its projection for the trajectory of interest rates, reflecting the persistent low level of rates that we have seen in recent years.) As a consequence, the United States can operate with substantial deficits for some time. 

But ultimately very large deficits year after year are a problem—there are limits to how large the national debt can be, though exactly what those limits are is not clear. Currently the national debt is about 80% of GDP, its highest level since the period after the Second World War. But at that time, the government was running surpluses, and the national debt was on a firm downward trajectory relative to GDP. By contrast, the CBO projects that deficits will grow over coming years, reflecting in part interest payments on the outstanding debt, demographic changes, and higher healthcare costs. Even in the absence of a recession, the CBO projects that the national debt will be near 100% of GDP by the end of the decade…

With large deficits in good times and the resulting high and rising level of federal debt, we may not have the flexibility to use fiscal policy aggressively in the next downturn, either because politicians may be uncomfortable with large deficits when the debt is already so high, or because financial markets become concerned about our ability to get deficits onto a sustainable path. If both fiscal and monetary policy are constrained, then recessions will be longer and deeper than would otherwise be the case, which is incredibly costly for our society. 

Of course, if the current large deficits reflected heavy government investment in infrastructure and human capital—investments that would pay off in terms of higher growth and productivity in the future—then the deficits could well be appropriate. However, the problem we face is that we are running large deficits while underinvesting in infrastructure and human capital. We need to use our fiscal resources wisely to support a stronger, more stable economy over time…

[The] Federal Reserve takes the fiscal policy decisions of the Congress and the Administration as given and then decides on the monetary policy that will best foster its objectives of maximum employment and stable prices. Thus, larger deficits will, all else equal, lead the Fed to set a more restrictive path of monetary policy in order to hit its objectives.  

The last time we saw budget surpluses was in the Democratic Clinton years. A George W Bush “guns and butter” approach, followed by the Great Recession that began during his administration where government support was infused into the system, started a deficit trend that ultimately exploded in the Trump years. As those in the middle and the lower rungs of the economic ladder are angry at this give-away for the rich, as they are now demanding that the federal government address their needs, something has got to give. The upcoming election will dramatically decide who gets and who gives. But one thing is for sure, if we do not invest now in future growth, we won’t have it. And without growth, paying down the deficits becomes close to impossible.

            I’m Peter Dekom, and understanding the economic reality, separated from the political rantings of “promise them anything to get elected” politicians, just seems to have faded from the radar of those expected to cast votes this November.