“The [U.S.] federal budget deficit is growing faster than
expected as President Trump’s spending and tax cut policies force the United
States to borrow increasing sums of money.”[1]
This observation was made just after the Federal Reserve Bank relented under
pressure from the White House to lower interest rates because bond investors
had been investing with a possible future recession in mind. With the U.S.
Government’s accumulated debt standing at $22.4 trillion and interest rates
already low, the limits to both fiscal and monetary policy were apparent even
if most Americans in the political and business elite were focused on avoiding
a possible recession in 2020.
According to the Congressional Budget Office in August,
2019, the federal deficit for fiscal 2019 would reach $960 billion; the deficit
for the next year would reach $1 trillion.[2]
Back during the Reagan administration in the 1980’s, deficits were in the
hundreds of billions and the debt was in the trillions. It would seem that the
fiscal imbalance had gotten worse since then, in spite of the fact that
recessionary periods were greatly outweighed by stretches of growth. In fact,
the U.S. in 2019 was in its longest period of economic expansion. Yet the
deficits and thus debt rose rather than dropped. President’s tax cuts in that
period of expansion played a significant role. Tax revenues for 2018 and 2019 fell
more than $430 billion short of what the Congressional Budget Office had
predicted.[3]
In August of 2019, the president made public his consideration of payroll tax
cuts just to guard against a possible recession (especially if one should hit
before the next election day).
Using recessionary fiscal tools during an economic expansion
means the deficits in good times won’t counter those in bad times. The result
in the case of the U.S. has been a steadily increasing accumulated debt, rather
than a debt from bad times being paid off in good times. That’s the fiscal
theory, but it ignores the insatiable desire for instant gratification in human
nature that can easily find power in a representative democracy. Accordingly,
the use of leverage, or debt, by a democratic government should be extremely
limited; tax cuts during periods of expansion can be seen as a red flag that a
government has already gone too far.
Fortunately, lower than expected interest rates even before the Fed’s announced rate cut in
August, 2019, reduced the amount of money the U.S. Treasury had to pay to
its borrowers. So the public as well as policy makers could conveniently
overlook the fact that the projected deficit for fiscal year 2019 was 25%
higher than the prior year’s deficit. One weakness of a democracy is that if
things look ok on the surface, needed work on the fundamentals—the substratum—will
likely be put off. It’s more understandable that the electorate would have this
weakness—less so for the elected representatives who know or should know the
fundamentals and look out for the fiscal balance of the government. Speaking of
balance, it is interesting that the federal system too was so much out of
balance with the federal level holding most of the governmental power even
though the States technically still had residual sovereignty. In other words,
the tremendous fiscal imbalance can be viewed as an indication or manifestation
of a more fundamental imbalance in the U.S. system of governments. In contrast,
the E.U. suffered from an imbalance in the other direction, as the state
governments anxiously guarded most of their powers.
See: Skip Worden, Essays on Two Federal Empires. Available at Amazon.
See: Skip Worden, Essays on Two Federal Empires. Available at Amazon.
1. Jim Tankersley and Emily Cochrane, “Budget Deficit Is Set to Surge Past $1
Trillion,” The New York Times, August
22, 2019.
2. Ibid.
3. Ibid.
