“I don’t think we should love deficits,” economist Doug Elmendorf told a Princeton University conference in February—just before COVID-19 sent America’s economy into a tailspin and the nation’s leaders began to spend trillions of dollars to cushion the blow and address the hardship—“but I do think we should worry much less now than most of us worried five and ten and 20 years ago.”
Six months later, Elmendorf’s remark remains striking for two reasons. First, just weeks earlier, the Congressional Budget Office (CBO) projected that, under current tax and spending policies, the annual budget deficit would hit a whopping $1 trillion in 2020 and continue rising until it topped $1.7 trillion in 2030. More to the point, it would total 4.6 percent of the economy (gross domestic product, or GDP) before topping 5 percent later in the decade. With deficits that high, Federal debt (the sum of all annual deficits, minus all surpluses) would rise from about 80 percent of GDP to nearly 100 percent in 2030—its highest level since 1946, after America built the massive war machine that brought victory. Not many years ago, such projections would have set off alarm bells among policymakers of both parties.
Second, the bookish, bespectacled Elmendorf wasn’t just an economist of some prominence. From 2009 to 2015, he served as CBO’s director, and he performed the role in the same serious, scold-like fashion as his predecessors. Whether testifying on Capitol Hill or speaking to reporters, he discussed the short- and long-term economic risks of big deficits and rising debt, and he urged lawmakers to put budget policy on what budget experts like to call “a sustainable path.”
So, even before President Trump and Congress responded to COVID-19 and the deep economic downturn by enacting the Families First Act, CARES Act, and other measures (adding nearly $4 trillion to a debt that already totaled $17 trillion at the end of 2019), Congress’s non-partisan budget office was projecting that America was on course for debt levels that it hasn’t seen for 75 years. And we were on that course even with the nation at peace and, at the time, a fairly strong economy.
Moreover, Elmendorf wasn’t the only former deficit “hawk” of good standing who was now peddling this new line. In a widely read piece in Foreign Affairs the previous spring, former Treasury Secretary Larry Summers and former Council of Economic Advisers Chairman Jason Furman wrote, “It’s time for Washington to put away its debt obsession and focus on bigger things.”
At some point, America will emerge from its pandemic nightmare with an effective vaccine that protects our health and calms our fears. Businesses will reopen, and people will go back to work. But the “return to normalcy,” as presidential candidate Warren G. Harding put it a century ago, will do nothing to diminish the deficits and debt we were facing before COVID-19. The question will be what the nation’s leaders plan to do about the coming waves of red ink.
That’s what makes the new line from Elmendorf, Summers, Furman, and others—rooted in new economic thinking and offering almost irresistible political benefits—so consequential, and perhaps troubling. All three are left-leaning centrists, not big-spending extremists. All three were top economic aides for the fiscally conservative, budget-balancing Bill Clinton. Summers and Furman also were top aides to Barack Obama, who sought in vain for a big deficit-cutting deal with congressional Republicans that would stem the rising tide of red ink of that time. They hail from the wing of the Democratic Party that, for decades, sought deficit reduction as a means to prevent economic problems.
With this new line from the centrists, the constituency for “fiscal responsibility”—for cutting deficits and preventing the debt from rising as a percent of GDP—continues to shrink. Most Democrats and Republicans have higher priorities: the former, big-ticket initiatives that they hope to enact under a Democratic President; the latter, more tax cuts to address whatever happens to ail America.
Historically speaking, Washington is sailing into uncharted waters, more indifferent to rising red ink than ever. Have the dangers of big deficits and mounting debt, about which so many lawmakers, economists, and opinion leaders used to preach, actually diminished? Or are we just convincing ourselves that they have?
When We Worried About Red Ink
For most of our 231 years as a nation, budget policy reflected a deep-seated cultural aversion to deficits and debt.
Between the nation’s founding and 1930, the President and Congress balanced the budget most years. And while they ran deficits nearly 50 times, it was almost always for one of two reasons: The economy was in the ditch, or the nation was at war. When the economy recovered or the war ended, policymakers would run surpluses to pay off the debt that accumulated in those deficit-driven years. The budget was small (just 4 percent of GDP as late as 1931), the Federal government assumed few responsibilities, and policymakers sought to balance the budget whenever they could.
Red ink stirred revulsion and fear among the nation’s leaders and its people. Thomas Jefferson, Andrew Jackson, and others considered it a sign of moral corruption and a portent of dangerous government excess. In the late 19th century, Republicans capitalized on that feeling by purposely overspending, paving the way for new revenue-raising tariffs that their business constituents wanted. Even in 1932, amidst the Great Depression, FDR ran for President by promising to balance the budget and, after enacting his sweeping New Deal, proposed budget-balancing measures in the late 1930s that sent a recovering economy tumbling once more.
The New Deal and, in 1936, John Maynard Keynes’ General Theory of Employment, Interest, and Money drove what Herbert Stein, who chaired the Council of Economic Advisers for Richard Nixon and Gerald Ford, called a “fiscal revolution.” The government grew steadily and, per Keynesianism, policymakers now viewed budget policy not simply as finding a way to pay for what they spent but as a key tool of economic policy. When the economy was weak, policymakers purposely ran deficits to spur demand and help ignite a recovery and, once the economy recovered, they sought to reduce deficits and even aim for balance.
The 1980s ushered in a new era, with Ronald Reagan cutting taxes and boosting military spending without securing the domestic cuts to make up the difference. Deficits were no longer cyclical (that is, largely determined by the state of the economy) but structural (under tax and spending policies of the time, Washington would not collect enough revenue to offset the spending even when the economy was strong). Red ink still prompted public revulsion, and budget balancing remained a core value in Washington and around the country. A clash between Washington’s new fiscal path and long-standing values was inevitable.
I came to Washington as a reporter in early 1985, and I immediately wanted to cover the budget because it was the leading issue in Washington. To those who didn’t experience it, I find it hard to describe just how much budget deficits dominated Washington in those days. Each year, Democrats and Republicans struggled to reduce soaring deficits while protecting their priorities (for Democrats, mostly domestic programs; for Republicans, mostly defense). From January when Congress reconvened to the fall or winter when it adjourned, the budget story overwhelmed every policy story other than war or recession.
For lawmakers, including those with higher political aspirations, the deficit was as much an opportunity as a burden. Before his prominence as the Republican presidential nominee of 1996, Senator Bob Dole pushed the large tax increase of 1982 that recaptured some of the lost revenue from the massive 1981 tax cut and, each year, pursued other tax increases and spending cuts. Before his prominence as White House Chief of Staff, Defense Secretary, and CIA Director under Clinton and Obama, Leon Panetta was a budget workhorse as a California Congressman, pushing for tax increases and spending cuts as a member and then Chairman of the House Budget Committee. In the Senate and House, Democrats and Republicans formed rump groups, often across party lines, to push for deficit cutting. Washington was engulfed in what I termed, in National Journal, a “deficit culture.”
Deficit fears haunted the ensuing decades as well. Government shutdowns (which occur when policymakers don’t enact spending bills to keep agencies funded) under George H.W. Bush and Clinton were driven by battles over how best to cut deficits, not whether to do so. The titanic budget fight between Clinton and House Speaker Newt Gingrich in the winter of 1995–96 wasn’t over whether to balance the budget (both had proposals to do so), but where to cut spending and whether to raise taxes. After deficits soared during the Great Recession of 2008 and 2009, Obama and House Speaker John Boehner sought to produce a large deficit-cutting package that, in the end, fell victim to insurmountable differences over the mix of tax increases and spending cuts.
Why did lawmakers care so much?
Of Crisis and Corrosion
The argument to reduce deficits and limit debt hasn’t changed much since deficits evolved from cyclical to structural. It’s rooted in concerns over short-term economic crisis and long-term economic corrosion.
The short-term concern is that investors, watching policymakers ignore the ever-rising red ink, at some point will start worrying about the Treasury’s ability to continue paying the interest on government bonds on time and demand a higher rate of return (that is, a higher interest rate) to continue buying them. That could trigger higher interest rates on all borrowing by families and businesses, which would weaken the economy. Or it could force policymakers to immediately raise taxes and cut spending to reduce deficits, which would weaken the economy. Or the Federal Reserve could “print more money” (or, technically, expand the money supply) to help the Treasury pay the interest or pay off the debt, which could ignite inflation. Higher inflation would reduce the value of U.S. debt, which could spur an investor sell-off that would force the Treasury to offer even higher interest rates to entice other buyers into the U.S. debt market.
The long-term concern takes various shapes, but they all lead to the same place: a weaker economy over time, with less growth, less investment, lower incomes, and lower living standards than otherwise. That’s because more government borrowing can “crowd out” private investment, as investors buy bonds rather than invest in the private sector, leaving us with fewer factories and machines, less equipment and software, fewer start-ups, and less technology. Or, as in the crisis scenario, more borrowing prompts investors to demand higher interest rates, which doesn’t spur a crisis but does slow the economy. Or rising debt increases the share of the budget that goes for interest, leaving less room for federal investments in education, infrastructure, biomedical research, and other drivers of economic growth.
Fortunately, to reduce the chances of crisis or corrosion, we don’t need to balance the budget. With deficits now so high, that would be a very tall order indeed, requiring years of dogged constraint. We just need policymakers to “stabilize” the debt—to prevent it from continuing to rise as a percent of GDP, which is what increases the chances of crisis or corrosion. They can do so through a combination of decent economic growth and lower deficits—though, to be sure, that, too, would be a sizable challenge. To further reduce the odds of short- or long-term trouble, policymakers should lower the debt as a percent of GDP over time. For inspiration, they might look to their predecessors of a half-century ago, who reduced the debt from 106 percent of GDP in 1946 to 23 percent in 1974.
In Washington, however, no one’s talking much these days about lower deficits or less debt. Rising red ink isn’t a top-line issue in the Trump-Biden race: With his tax cuts, defense build-up, and vow not to cut Social Security or Medicare, Trump was never serious about deficit cutting to begin with, and Joe Biden has offered no plan to pursue it. Nor is the rising red ink a subject of much debate on top op-ed pages. Does anyone still worry about deficits and debt? If not, what does that portend?
The Center Does Not Hold
Deficit cutting has fallen victim to the same extremism and tribalism that is plaguing policymaking in general.
In an earlier era, centrists of both parties led the deficit-cutting effort, for deficit reduction is an exercise in profound compromise. Republicans must agree to raise taxes and limit defense; Democrats, to scale back domestic programs. As the center has shrunk, due to redistricting, cable news, social media, and all the other factors that now make compromise a dirty word, so too has the constituency for deficit cutting. Since the late 1970s, Republicans have increasingly sacrificed their traditional fiscal rectitude to the goal of tax cutting. In the post-Obama period, Democrats have increasingly abandoned deficit cutting to pursue big-government initiatives in healthcare, climate change, infrastructure, and other major challenges.
Nor has “Chicken Little” proved helpful. Pushing for action, the centrist deficit “hawks” often warned of economic peril. But, while the economy has experienced its ups and downs, red ink never seemed to influence the trajectory. Federal Reserve efforts to tame inflation drove the deep recession of the early 1980s, financial collapse drove the Great Recession of a decade ago, and COVID-19 drove the deep downturn of today. The milder recessions of intervening years also were hard to tie to soaring red ink. If not every policymaker fully subscribed to Vice President Dick Cheney’s purported line that “deficits don’t matter,” most of them surely came to fear deficits and debt less than their predecessors.
You can hardly blame them. The short-term crisis never materialized. Quite the contrary, global economic disarray—whether during the Great Recession or now—only made U.S. debt more appealing for investors. The Treasury market represented a safe haven, a place to secure a guaranteed return because, in the eyes of investors, America is home to both the world’s largest economy and its most stable democracy. (Whether that reputation will fully survive the chaos of this year’s elections or, if it comes to pass, the authoritarian temptations of a second Trump term is an open question.)
Long term, the story is more complicated. Yes, the economy roared and living standards rose at all income levels in the late 1990s, as deficits gave way to four years of surpluses starting in 1998. But so too did the economy mostly roar in the 1980s, after structural deficits emerged. Yes, growth has slowed over the past two decades as deficits and debt have risen, but you would be hard-pressed to prove that red ink was a more important factor than, say, the lingering effects of the mild recession in 2001 and the Great Recession a decade later, or sluggish productivity growth, or global economic competition.
An Uncertain Future
To overstate things just a bit, the budget story of the past three decades is one of Republican profligacy (tax cutting) and Democratic responsibility (deficit cutting).
After breaking his “no new taxes” pledge, George H.W. Bush was forced to work closely with congressional Democrats on a big deficit-cutting package in 1990 after House Republicans abandoned him over the tax increases. Three years later, Clinton pushed his own big deficit-cutting package through Congress with only Democratic votes after Republicans warned (in spectacularly wrong fashion, as it turned out) that its tax increases would destroy the economy. George W. Bush then helped turn Clinton’s surpluses into deficits with, in large measure, his tax cuts of 2001 and beyond, and Trump made the problem worse with his tax cuts of 2017.
If Biden wins the presidency and Democrats take control of Congress, don’t expect them to seize the moment and once again address the red ink. If they feel burned, you can hardly blame them. They took the political heat for Clinton’s tax increases that helped balance the budget, but two Republican Presidents then pursued tax cutting that largely set the stage for today’s rising red ink. Democrats won’t likely feel all that eager to take the political heat once more to address the results of Republican profligacy.
Now, some leading Democratic economic advisers argue that they don’t need to anyway, at least not yet. That’s largely because interest rates, a big bugaboo of yore when it came to either crisis or corrosion, aren’t nearly as scary as they had seemed. Rather than rise in response to rising deficits and debt, they have fallen over the past two decades. In 2011, for instance, the interest rate on ten-year Treasury notes was 3 percent and, two years later, CBO projected that it would rise to 5.2 percent by 2018 and stay there for years to come. As it turned out, that rate fell to 2.5 percent in 2019, and, this summer, CBO projected that it would hover around 1 percent for the next few years and rise only to 3 percent by 2029. When it comes to rising red ink, that’s a very big deal. Lower rates have reduced Federal borrowing costs and interest payments on the debt. Since interest rates are low, all that Federal borrowing apparently isn’t “crowding out” private investment, nor are investors worrying that Uncle Sam won’t make its payments on time. Apparently, Washington can afford to run higher deficits and accumulate more debt than policymakers once thought was economically safe.
“The reduction in the cost of government borrowing is a dramatic change in the economic backdrop for decisions about budget policy,” Elmendorf declared at Princeton. “[M]ore debt has less economic cost when interest rates are low.” Similarly, Summers and Furman wrote, “Long-term structural declines in interest rates mean that policymakers should reconsider the traditional fiscal approach that has often wrongheadedly limited worthwhile investments in such areas as education, healthcare, and infrastructure. . . . Politicians and policymakers should focus on urgent social problems, not deficits.” That other top economists like Olivier Blanchard, the IMF’s former Chief Economist, also foresee a new era of low interest rates gives this new centrist thinking more credence.
What, precisely, do the centrist Democratic economists advise? A fiscal version of the Hippocratic Oath—“first, do no harm.” That is, don’t throw all caution to the wind. Don’t spend irresponsibly and make the problem worse. Find ways to pay for the new initiatives that you want Washington to undertake. But whether it’s addressing climate change, plugging holes in health care, or investing in struggling communities, make these initiatives a greater priority than addressing deficits and debt. Yes, they say, we eventually must address deficits and debt, but they offer no timetable and no criteria for doing so.
By the way, even with their greater tolerance for deficits and debt, Elmendorf, Summers, and Furman still represent the moderate wing of Democratic fiscal thinking. Competing with their view is “Modern Monetary Theory (MMT),” which postulates—per a New York Times op-ed of June by Stephanie Kelton, its best-known promoter—that since the United States borrows money in its own currency (dollars), it can finance the higher spending by printing more dollars, rather than paying for it with higher taxes. If, at some point, printing lots more dollars generates higher inflation, policymakers would then need to address the rising red ink. Needless to say, with higher inflation currently nowhere in sight, MMT makes lots more spending for education, healthcare, climate change, infrastructure, and anything else even more politically feasible. The centrists deride this unorthodox theory, but it’s gaining support on the political left.
So, here we are. Deficits are growing. The debt is on track to top its highest level ever. Republicans want more tax cuts because they always want them. Democrats are tired of cleaning up after Republicans fiscal messes. And even top centrist Democratic advisers no longer think they urgently must do so. On both sides, the economic fears of yesteryear have melted away, replaced by new thinking that provides a convenient excuse for anyone with a policy agenda to pursue it with gusto. With no one terribly worried about rising deficits and debt, off we shall go, into the wild red yonder.
The only question is whether, at some point, those who warned about crisis, corrosion, or both will turn out to be right.