By Dennis W. Jansen Andrew J. Rettenmaier
"…[avoid] likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts, which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden, which we ourselves ought to bear."
George Washington, Farewell Address, September 17, 1796
In January 2017, the 115th Congress of the United States convened for its 2-year term as we inaugurated our 45th President. That same month, the Congressional Budget Office (CBO) released its analysis of the fiscal situation facing the United States over the coming ten years, "The Budget and Economic Outlook: 2017 to 2027." The report describes the situation that Congress and the President inherited from their predecessors. This inheritance was a projected path of increasing deficits and growing government debt relative to national income as measured by Gross Domestic Product (GDP).
The deficits are fueled by a path of increases in government spending. Government spending in 2014 was 20.3 percent of GDP, equal to our 50-year average rate of spending. CBO projections indicate rising spending rates, from 20.5 percent of GDP in 2018 to 23.6 percent in 2027. In other words, no return to our long-run average. This same CBO report projected continued growth in GDP and low unemployment. In such a situation, George Washington advocated repaying debt and running government surpluses. Our political parties both advocate fiscal responsibility, and in 2016 this was most strongly stated in the Republican Platform.
Economists often counsel that we look at 'revealed preferences,' the idea that actions speak louder than words. What does this viewpoint tell us about our commitment to fiscal responsibility starting from last January?
On the tax side, Congress passed The Tax Cuts and Job Act of 2017, signed into law by the President on December 22. This Act lowered the corporate tax rate, widely viewed as a necessary feature to preserve U.S. competitiveness, and CBO forecasts after this date include a higher path of GDP. However, this Act was not revenue neutral and it lowered tax revenues relative to GDP, at least until the individual tax cuts expire.
Next, Congress passed The Bipartisan Budget Act of 2018, signed into law on February 9, and The Consolidated Appropriations Act of 2018, signed into law on March 23. Together, these bills raised previously set spending caps. They appear to have done nothing to alter the ever-increasing path of spending relative to income.
The CBO analyzed the impact of these tax and spending changes in a document published on April 9, 2018, "The Budget and Economic Outlook: 2018 to 2028." Despite the growth-inducing effect of the tax cuts, the net result is forecast by CBO to be continuing growth in the rate of spending, reductions in tax revenue, increased deficits, and consequently a faster rise in the national debt. This latest CBO report, released 15 months into the term of the new Congress and the new President, suggests that the actions taken to date are not consistent with the advice of our first president.
We are living in a time of economic expansion, low unemployment rates and an economy operating at its potential. Good policy generally consists of smaller deficits or even surpluses in good times to balance the larger deficits that occur during recessions. We are not following this policy; times are good but our debt is increasing. In the last year, our Congress and our President have acted to further increase our deficit and our debt. At some future date the inevitable recession will occur, and deficits will increase over and above these CBO projections. Policymakers may find themselves forced to choose between unacceptable debt levels and unacceptable levels of unemployment.
The United States is on an unsustainable path for fiscal policy. Absent a change, we will eventually face a day of reckoning. Spendthrift nations who ignore budgetary realities eventually run into hard constraints. Will we default like Argentina? Will we seek bailouts like Greece? Will we turn to the monetary printing press like Venezuela? Or will we decide to stop fiddling and make the difficult choices needed to achieve fiscal responsibility?