Sunday, May 15, 2011

Deficits imply an increased future tax burden

Published in The Tennessean, Sunday, May 15, 2011

by Richard J. Grant

Over the years from 1792 to 1930, the federal government ran surpluses twice as often as it ran deficits. But in the 80 years since 1930, the federal government has run annual deficits seven times more often than it has run surpluses. It has been 10 years since the last surplus.

During the first hundred years of the Republic, it was not at all unusual to see significant reductions in the national debt. Debt was always recognized as a useful tool in the pursuit of national interests, but that recognition was balanced by a strong ethical imperative to avoid deficits and to pay down the national debt whenever possible.

The Great Depression marked a turning point in this ethical attitude. In 1932, when government revenue fell to half its 1930 levels and spending rose by more than 40 percent, President Herbert Hoover stumbled through an election-year with a deficit that was almost 58 percent of the budget. His opponent, Franklin Roosevelt, demanded a return to fiscal rectitude. Roosevelt still believed, as did most citizens, that public debt was little different from household debt.

As president, Roosevelt’s attitude changed. He never did balance the budget, but ran pre-war deficits, most of which were higher than in Hoover's worst year. The initial deficits swelled in political response to the pain of the stock market crash and the recession that followed. Only later was the stigma associated with debt accumulation weakened by an effective philosophical assault.

The idea of British economist John Maynard Keynes, that it was prudent deliberately to increase budget deficits during times of recession and then balance them with surpluses after the recovery, provided a new justification and political cover for deficit spending. Just as it has always been easier to water down ethical rules and cultural virtues than to restore them, it was easier to get politicians to create deficits than it was to produce the corresponding surpluses. Political expediency took it from there.

Although the stigma of debt never fully disappeared, it was overwhelmed by optimism and the expectation that we would always outgrow the debt-service burden. The dollar amount of the national debt has grown accordingly. Increases to the legislated debt limit became routine and perfunctory.

The government is now borrowing 40 percent of the dollars it spends. The national debt is growing 3 to 5 times faster than economic output and is approaching 100 percent of GDP. Taxpayers are increasingly aware that current deficits imply an increased future tax burden and that most government spending, especially “stimulus” spending, is counterproductive. The next increase of the debt ceiling will not be perfunctory.

House Speaker John Boehner, R-Ohio, has insisted that any increase in the debt ceiling must be matched by real spending cuts of at least equal size. If Senate Democrats and the president can't agree to this, then the government will run out of legal borrowing capacity by August. Either way, budget cuts are required.

The need for cuts would be mitigated only if increased economic growth were to yield higher government revenues. But this is made less likely by the heavy fiscal and regulatory burdens imposed by the administration and the previous Congress.

We are learning that hope is not currency and that there are real economic and social consequences when we use government to evade old ethical rules.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011