How The Deficit Doves Helped Create Our Current Debt Crisis

Part One: They continually left to some future legislature the task of paying for what they wanted.

In recent years, even those who have long supported ever-larger federal deficits have come around to saying that “this time it’s different” and that the government needs to start paying attention to its growing federal debt. While they sometimes base their current case on factors such as rising interest rates, they discount too heavily the extent to which past deficit-increasing actions have contributed to today’s problems. They also fail to admit that the extraordinary bills and compounding future obligations left for future Congresses have created a political box that threatens both the nation’s financial future and its ability to turn its attention to new opportunities and needs.

In simple terms, there are three potential justifications for running deficits.

(1) Countercyclical policy. When unemployment rises, the nation operates below potential. Increased spending and tax cuts can boost demand and create a multiplier effect that helps restore economic growth and full employment.

(2) Investment opportunities. As in the private sector, the government can borrow to fund investments that will pay off in the future. Republicans argue that tax cuts will spur greater private investment, with some claiming that tax cuts even pay for themselves. Democrats contend that the additional spending will enhance human capital, such as knowledge and know-how, or support environmental and other improvements that yield greater future value than the debt incurred.

(3) Low borrowing costs. For many years of this century, particularly from the Great Recession to about 2022, the real interest rate—that is, the nominal rate less inflation—hovered around zero. That tends to make borrowing appear costless, at least for a while.

Wonkish detail: Some economists (not me) like to use an accounting identity: if spending, excluding interest costs, is matched by revenues (leaving the primary deficit at zero), then any accumulation of debt, no matter how large, can be sustainable. In particular, debt will no longer grow faster than the nation’s income, even without any spending increases or tax cuts, as long as the economy grows at the same or greater rate than the interest rate.

Don’t worry if you don’t understand this. The point is that this identity’s base condition is not met. In almost every developed democratic nation, future spending has been scheduled to rise faster than future revenues, so legislated tax increases and spending cuts are still required. And, as discussed below, the interest rate that will apply in the future to any current borrowing is unknown.

So, what went wrong?

First, the case for countercyclical spending requires balance over economic cycles. Since the 1950s, politicians and economic advisers to those in power have tended to argue that we are entering into, in, or just coming out of a recession. When enacting their new giveaways to the public, as during the Great Recession and COVID-19 crises of this century, federal legislators largely refused to legislate even later offsetting takeaways. That was someone else’s job.

Second, by the time Congress finishes giving away money, the net amount allocated to items that might be considered investment usually becomes modest to trivial. Legislated tax cuts and spending increases almost always involve significant payoffs to different interest groups.

Third, even when the federal government could borrow temporarily at a low or zero interest rate, there was no reason to expect that the rate would remain at historical lows. Thus, a return to more normal rates, such as those that have occurred recently, would apply not only to new debt but also to the old debt that gets rolled over. Consequently, any savings over time from temporarily low interest rates typically range from low to moderate, even for one-time increases in debt. Consider, by analogy, a new roof you might have purchased with a teaser credit card rate or an adjustable-rate mortgage.

Fourth, Congress likes to make its giveaways continue, in many cases, forever, so the new giveaways, such as a business tax incentive or covering a new drug under Medicare, are seldom one-time. Thus, the question is often not whether, say, $100 spent today on a new program or tax subsidy is a good idea, given economic circumstances or low interest rates; rather, it’s whether $100 given away this year, next year, and for years to come, along with the compounding interest costs, should be enacted without paying for it through some offsetting spending cut or tax increase.

Fifth, with rare exception, higher debt and interest costs provided a way to favor past priorities over current ones. In today’s context, for instance, the unpaid-for spending and tax priorities of the past continue to usurp efforts to address the needs of the working class and the young.

In my next column, I’ll turn to the biggest problem of all. The arguments favoring the deficit increases in recent decades have often been ahistorical—that is, they ignore budget conditions that vary markedly over time. Both the short-term and long-term budget require some balance, and deficit doves have almost always ignored the latter. That neglect has now come to haunt us.