Let’s concede that higher deficits are one problem that can’t be blamed on President Trump. Since the 1970s and 1980s, Democrats and Republicans alike have evaded the hard questions required to balance the budget.
Should we direct more — or less — aid to those in the bottom half of the income distribution? Have we shortchanged defense? With an elderly population that is richer and healthier than its predecessors, should we raise eligibility ages for Social Security and Medicare? Should government continue to run a railroad (Amtrak)? Are we undertaxed? Do farmers need to be so heavily subsidized?
We have deferred these and other difficult decisions. Instead of cutting spending or raising taxes, successive presidents and Congresses have covered the gaps by borrowing. Since 1961, federal deficits have occurred in all but five years (1969 and 1998-2001). Even these materialized only at the end of the long economic booms of the 1960s and late 1990s.
By the end of 2018, the federal debt held by the public — the total of all past annual deficits — was near $16 trillion, equal to 78 percent of the economy (gross domestic product, or GDP). On present trends, the Congressional Budget Office projects that the debt will reach $29 trillion in 2029, about 95 percent of GDP.
Though Trump didn’t create the deficits, he has played the game with zest, embracing massive tax cuts and sizable spending increases. Politically, the appeal is obvious: something for nothing. Politicians can dispense new spending or tax cuts without paying for them through offsetting tax increases or spending cuts.
Meanwhile, government’s activities have mushroomed, financed mainly by declines in defense spending. In 1960, military outlays represented 52 percent of the total federal spending. Now, they’re 15 percent. In their place are health-care programs (Medicare, Medicaid and Obamacare), expanded Social Security, the FBI, the Environmental Protection Agency and more.
Americans have gotten used to Big Government while paying only for smaller government. One reason that this has — so far — worked is that the dollar is the world’s major currency for international trade, investment and personal saving. People take refuge in it. Lending and borrowing in dollars create a global demand for the currency. It’s easy for our government to borrow at low interest rates.
Democratic presidential candidates have tried to burnish their financial credentials by arguing that new spending can be financed by taxing the wealthy. But this is likely to disappoint.
Take Sen. Bernie Sanders (I-Vt.). He favors a wealth tax that would start at 1 percent of net worth above $32 million and peak at 8 percent of net worth exceeding $10 billion. (Net worth compares assets, such as stocks and bonds, with liabilities, such as loans.) The Sanders campaign estimates the plan would raise $4.35 trillion over a decade.
But when the Penn Wharton Budget Model did an independent analysis, it estimated that the 10-year revenue would be only $3.3 trillion, a 24 percent drop from Sanders’s forecast. Worse, this estimate disregards the effects of the new tax on the economy. When that is included — economic growth is lowered — the added revenue from the tax falls to $2.8 trillion over 10 years, a 36 percent decline. Taxpayers rearrange their affairs to minimize taxes.
This is just the latest chapter in our tendency to disguise the costs of government. The assumption is that they can be easily absorbed without burdening the middle class. The resulting complacency is inevitable. It poses two dangers.
First: As government debt piles up, it increasingly crowds out private investment. This, in turn, weakens productivity growth, which is a major source of higher living standards. With interest rates now so low, this doesn’t seem a problem — which is why it is.
Second: The truly scary possibility is a run on the dollar. If huge budget deficits subvert global confidence in the dollar — causing investors to dump the currency — restoring that confidence might require deep cuts in federal spending and steep increases in taxes.
How we define the role of government determines the need for financing. Ideally, we ought to face these issues sooner rather than later. The odds of this happening seem negligible. We deplore deficits but find them more acceptable than the alternative. No one really knows how much debt is too much. Our policy seems to be to wait until we discover the answer. But by then, it may be too late.
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