We’re not all Keynesians anymore, it seems.
For most of the past 70 years, the federal deficit has been strongly counter-cyclical. That means when the economy goes down, deficits go up. After all, in bad economies, tax revenue falls as people and corporations make less money. Government spending also usually rises. Some of this bump in spending happens automatically as people become poorer and qualify for government services (unemployment benefits, food stamps); some of it comes from deliberate, one-off stimulus measures.
In a recent client note, Goldman Sachs Economic Research put together the following chart, which shows budget deficits or surpluses (expressed as a share of the economy) tracking unemployment (inverted here, to make the trends easier to see).
As you can see, from 1948 until a few years ago, the trends are pretty closely aligned. The main exceptions were during the wars in Korea and Vietnam, when government spending rose to fund the wars.
Starting several years ago, however, the trends diverged. The job market continued to get better, but deficits continued to get worse.
Note that this decoupling of economic conditions and deficits predates Donald Trump’s election to the presidency. However, his massive tax cuts and potential increase in spending (assuming we ever fund infrastructure and a wall) will make deficits grow even more, regardless of what the economy does.
The Goldman research note points out that this isn’t just an unusual time in the economic cycle to have expansionary fiscal policy; it’s also an unusual time in the political cycle.
Stimulative fiscal policy more often comes right before, rather than right after, a presidential election, perhaps so that Americans enter the polls feeling a little more flush:
On average over the four-year political cycle, the first year of the presidential term is associated with fiscal tightening…Fiscal policy typically becomes more expansionary in the final two years of the term, ahead of the next presidential election. While the fiscal expansion currently under way is likely to support growth ahead of the midterm election, its effects are likely to begin fading by late 2019 and we expect little impact by 2020. We also note that historically fiscal policy has become incrementally tighter, on average, when the government moves from single-party control to divided government, as looks increasingly likely following the midterm election.
Here’s Goldman’s chart showing fiscal policy over the political cycle:
So why has Trump diverged from this historical pattern and engaged in expansionary fiscal policy so far ahead of his reelection campaign? That is, why didn’t he wait to time his stimulus plan when it could help him most?
One possibility is that he’s not that forward-looking. Trump came into office with historically low unfavorable ratings; he wanted to do something that he thought would boost his numbers in the near term, 2020 be damned. (Of course, given how unfavorable the public’s views of the tax plan have been, it’s not clear that this would be a good strategy.)
Another explanation, of course, is that Trump and other Republicans had made tax cuts the centerpiece of their party’s platform. Their best shot at delivering was early in Trump’s presidency when they knew they had unified government control.
Or, finally, the public just doesn’t care much anymore about big deficits, so Trump expects that he can keep blowing up budgets indefinitely.
A recent survey from Pew Research Center asked respondents whether they think various issues and initiatives, including reducing the deficit, should be a priority for the president and Congress this year. This question has been asked many times before, and the share calling deficit reduction a “top priority” has fallen dramatically in recent years.
In 2012, under Barack Obama, 72 percent said reducing the deficit should be a top priority; today, the share is a mere 48 percent.
That’s the lowest number since January 2003, which for context was not long after we had just had several years of budget surpluses (from 1998 to 2001). So, of course, there might not have been much concern around that time about deficits. Today, by contrast, people don’t care about reducing deficits even though deficits are large and growing, especially relative to where we are in the business cycle.
By the way, both Republicans and Democrats have grown less concerned about deficits in recent years:
No wonder all those supposed deficit hawks in Washington — from either party — appear to have flown the coop.