Fiscal Year 2019 is finished and the deficit ticked in at just under $1 trillion dollars. Just to put that in context, a trillion dollars is more than $3000 for every person in the United States; the federal government is spending that sum into existence every year without hardly anyone worrying about inflation. Given this remarkable turn of events, it seems like a good time to review the current assumptions in Washington concerning the federal budget.
1 Trillion dollar annual deficits are here to stay. Even the ever-optimistic Office of Management and Budget (OMB) projects them for at least the next four years.
2. No one believes this trillion dollar level poses a near-term threat to proposed federal fiscal operations. The Fed can effectively fund—directly or through policies—whatever shortfall occurs, while still maintaining whatever short-term interest rate it desires.
3. There is no constituency pushing for a near–term deficit-reduction policy. Deficit hawks (such as they are) speak only about nebulous dangers in a distant future.
Given these premises, it is surprising to observe that so few presidential candidates are talking about increasing the deficit through higher spending, lower taxes, or both. Even those Democrats proposing programs like Medicare for All and free public university tuition feel compelled to offer reasonably detailed methods of paying for them. Of course, the idea that the government should spend responsibly and avoid taking on excessive debt still resonates with the average salary earner in the heartland, but there is a consensus in policy circles that deficits don’t matter, and will not matter until consumer price inflation takes off.
We began writing this commentary during the recovery from the financial crisis of 2008-09, when the deficit had exploded under the twin blasts of lower tax revenues and higher safety net spending. Back then, trillion dollar deficits were referred to as “stimulus” and policy discussions centered around when and how to withdraw it. In just a few short years we have reached the stage where trillion dollar deficits are normal, and no one is talking about how to reduce them.
As for the future? It was a bit of an understatement when we suggested that the OMB projections were typically optimistic. Compare OMB’s five-year revenue estimates from 2014 with actual results:
(In fairness, the tax law changes of 2017 were not included in the projections and did reduce revenue slightly, but only in 2018 and 2019.) The President’s budgetary authority, then, was off by a mere $800 billion in their five-year projections of 2014. OMB’s current prediction of average annual revenue growth of 6.7% until 2024 is most likely equally unrealistic, as is its estimate that outlays will only average a 3.8% annual increase over that same time.
We live in a time when “permanent stimulus” by the federal government is required to keep the economy going, and there is no end in sight.
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