Is Washington approaching fiscal fatigue? Particularly during the past year, but also generally since the financial crisis, deficits and debt have not mattered to policymakers. Now political profligacy and hypocrisy could be leading to an unexpected public demand for economic frugality.
With the same suddenness with which coronavirus struck, America’s economy collapsed. After a solid but unspectacular 2019 (2.2% GDP growth), 2020’s first-quarter GDP fell 5% and another 31.4% in the second quarter; for the year America’s economy shrank 3.5% — the largest drop since 1946.
Washington has responded with a massive economic response. The Federal Reserve slashed interest rates to historic lows and pumped $5.6 trillion into the economy. The federal government enacted five relief bills worth $3.9 trillion. Assuming enactment of the latest $1.9 trillion package, total fiscal relief would amount to 27% of total U.S. GDP; including the Fed’s injections would take total federal action up to 53%.
This concerted action to “fill the hole” in America’s economy has left one in Washington’s budget. According to the Congressional Budget Office’s latest estimates, the federal government ran a $3.1 trillion deficit last year and is projected to run a $2.3 trillion one this year — an estimate that does not include the $1.9 trillion relief package. The impact on government debt has been equally dramatic: Debt held by the public jumped from 79.2% of GDP in 2019 to 100.1% in 2020 — the largest annual increase since WWII.
This dramatic one-year surge comes on the heels of a 12-year upswing in federal debt. Looking at historical data, federal debt as a percentage of GDP stayed in a relatively narrow percentage band from roughly the mid-20s to the mid-40s of GDP from the 1960s to 2008. Having increased from 35.2% in 2007 to 39.4% in 2008, when the financial crisis’s impact registered, it doubled to 79.2% over the next 12 years.
There have been many economic reasons given why deficits and debt do not matter. Currently with America in a pandemic, the reasoning is that the near-term danger from economic collapse outweighs the longer-term concern over deficits and debt. This reasoning also parallels a more general argument, which has prevailed in Washington over the past 12 years as debt doubled, that deficits and debt are not economically concerning.
The general unconcern over debt cites current low interest rates restraining debt service costs. It also notes that rising debt has not hurt U.S. economic growth over the past 12 years and that other countries’ historical examples make the same point.
In short, the prevailing argument is the politics does not understand economics, and this misunderstanding is typified by the analogy of a family’s budget with Washington’s. Families do not have the power to tax, which greatly increases a government’s borrowing power to service its debt. Nor do families have control over the money supply denominating their debt.
Yet if politics does not understand the world of ethereal economics, economics can also fail to understand the plebian world of politics. While families are not economically analogous to governments, they are politically fundamental to Washington: They vote.
Families are understandably sensitive to spending practices that so contradict their own. That the past 12 years have been such an abrupt departure only fuels their concern. Even more concerning are the spending’s ramifications, specifically: How will it be paid for? They have long experience with government at every level inevitably returning to them for higher taxes. Finally, they are quite familiar with borrowing, but when they do it, they expect to get something tangible — a house, a car, a child’s education — for it. Over the past 12 years, they see nothing to point to.
The past 12 years’ experience has only been reinforced by last year’s. They have gone without; Washington seems to have gone wild. While they were economizing unprecedentedly, Washington has been spending unprecedentedly. While their savings declined, Washington’s debt soared.
Regardless of how irrelevant to economics these perceptions may seem, they will not be irrelevant to politics if they are relevant to voters. Compounding their economic misgivings is resentment over politicians’ hypocrisy who have ordered them to do one thing during the pandemic, only to do otherwise themselves. Together voters’ perceptions of profligacy and hypocrisy could be setting the stage for an unanticipated backlash against deficits and debt.
J.T. Young served under President George W. Bush as the director of communications in the Office of Management and Budget and as deputy assistant secretary in legislative affairs for tax and budget at the Treasury Department. He served as a congressional staffer from 1987 through 2000.