When your humble commentator began this monthly series in the dark days of 2009, one of his major concerns was the growth of the federal deficit and the presumed resulting danger to the American currency and the financial system. At that time, Washington was spending more than a trillion dollars than it took in each year, and pundits and congressmen alike were predicting a disaster of biblical proportions. And although the size of the deficit leveled off at roughly $500 billion thanks to an economic upturn, fulminations against the rising debt continued to echo through the halls of power.
With the election of 2016 and the subsequent shifting of political dynamics, however, concern about the debt seems to have subsided. Republicans do not want it to interfere with whatever tax reductions finally make their way out of Congress (despite what might be bandied about during tours of their constituencies); the Democrats use it only as a debating stick if at all. The new administration’s Office of Management and Budget (OMB) did produce a budget “blueprint” which promised a balanced budget in ten years, but only by double-counting $2.5 trillion in revenue from the presumed economic growth produced by the still uncertain tax cuts. This error, however, was widely ignored in Washington on the basis that everyone knows that budget projections more than two years out are a bit like asking children what they want to be when they grow up—honored more for the boldness of their aspirations than their projected accuracy.
It appears, then, that the deficit will continue to amble along at roughly $500 billion annually until it is expanded by either tax cuts or a recession (or both). While long-time readers will recall that this is not a concern for the reasons usually given—the crowding out of investment capital or the inability to sell Treasury debt—the continued rise in the deficit will eventually lead to an existential crisis which questions the nature of the government’s debt. That is to say, at some point people are going to ask why we need to worry about the federal deficit at all.
There is a theory of fiscal policy that holds that governments which issue their own currencies and borrow in the same do not tax in order to spend; rather, they spend and then “soak up” that spending with taxes. In this view, the deficit need only be a concern when it seems to cause currency devaluation and inflation; absent those, the federal government (in partnership with its central bank, the Federal Reserve) can do as it likes. For example, during the Second World War, the United States government did not worry about spending whatever dollars were deemed useful in defeating the Axis powers—it did, however, worry about the dangers of inflation. Wage and price controls were decreed and enormous efforts were made to convince Americans that they should exchange their dollars for Treasury debt issued at a rate set by the Treasury. On the other side of the fiscal coin, the now-familiar practice of withholding taxes from paychecks was begun and tax rates were raised. The Federal Reserve Bank was reduced to the role of ensuring that interest rates remained low and currency remained available (one cannot resist the observation that this sounds much like Quantitative Easing.) If the United States were ever to face a war for survival again, you can be sure that budgetary considerations would be pushed aside in like manner.
It requires only one logical step from the idea of spending “whatever it takes” to win a war to the idea of spending “whatever it takes” to accomplish some other societal desire—be it a modernized energy infrastructure, continued retirement security, or universal health care. Right now, the proponents of these programs still are compelled to explain how they will be “paid for,” but what if they did not, in fact, require either tax increases or spending reductions in other areas? Eventually, a populist politician will come along offering benefits to an American public which sees its standard of living eroding (especially among the young). If the deficit is $20 trillion, one might indeed wonder what would be the problem with making it $21 trillion, especially if one could foresee tangible benefits to accruing to oneself from the spending. Of course, the argument for tax cuts rather than increased spending follows much the same logic, although it would appeal to a different sector of the electorate.
It is this nascent populist appeal which has found voice in the campaigns of Bernie Sanders and Jeremy Corbyn. At some point the financial powers that be may find it necessary to tighten financial conditions to blunt this line of thinking.
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