For several years, the growing federal debt was ignored as the economic recovery chipped away at once massive spending shortfalls of $1 trillion or more. Now, there’s an uneasy feeling among many policy makers and experts that we are beginning to slip back into risky fiscal terrain.
The last time the budget was in balance was in 2001, at the tail end of Democratic President Bill Clinton’s second term. While the government has been awash in red ink ever since, President Obama and congressional GOP leaders have rightfully crowed about a series of bipartisan deals that helped bring down the annual deficit from an astounding $1.4 trillion in 2009 – at the very worst point in the recession – to $438.4 billion just last year.
But times are changing again, and the non-partisan Congressional Budget Office (CBO) has issued several distress calls in recent months that the deficit is headed north again. We will return to another era of big deficits, CBO warns, unless Congress and the White House step in with some meaningful spending reforms. And that, of course, means figuring out how to provide Medicare, Medicaid and Social Security to a growing army of retiring baby boomers without breaking the bank.
Six years ago, The White House and Congress had a real chance of reaching a “grand bargain” of tax and spending reforms that would have put the government on a true, long-term course to another balanced budget. But as is often the case, a lack of political nerve and political foresight prevented that from happening.
Today, we are mostly treated to political doublespeak and hypocrisy about the budget and the need to address a national debt that has reached an historic $19.2 trillion. And that hypocrisy – being played out on Capitol Hill and on the presidential campaign trail – is driving budget and economic experts and average Americans to distraction.
It is hard to miss the fact that Congress is once again so politically hamstrung that House and Senate GOP leaders this week threw up their hands and abandoned efforts to pass a budget for the coming fiscal year. There will still be spending bills – have no fear. But the thought of fashioning a comprehensive blue print with a coherent and feasible plan for addressing the long-term debt is out of the question.
Things are no better on the presidential campaign trail where Republicans Donald Trump and Ted Cruz are promoting huge tax cuts that would add trillions of dollars to the national debt. Democrat Bernie Sanders is pushing an $18 trillion “Great Society” style spending agenda that will add many trillions more to the national debt, while Clinton’s adds $1 trillion in additional spending and could reduce tax revenue.
Time Magazine this week published a special issue about the federal debt, turning its cover into a collection notice claiming, “Every American man, woman and child would need to pay” $42,998.12 in order to eliminate the national debt.
The cover story by economist James Grant, of Grant’s Interest Rate Observer, is part diatribe about government spending and the role of the Federal Reserve and part paean to the gold standard. It concludes with a half-hearted endorsement of a flat tax plus a call for the end of employers withholding taxes from employees’ paychecks.
Grant makes the indisputable point that the federal debt has exploded in recent years, particularly as the government used monetary stimulus to keep the nation’s economy from sliding into a depression.
But in his telling of the story, the Federal Reserve comes across as the villain -- “the government’s Monopoly-money machine” -- that has enabled a profligate Congress to spend the country into a crisis. “The Fed once fought inflation,” he laments. “Now it actually sets out to cause it–about 2 percent a year is the target. Striving to inflate, it presses down interest rates and rustles up new dollars.”
That’s not a story that most of Grant’s fellow economists are likely to agree with. While virtually all would likely say that the federal debt is higher than it ought to be, substantially fewer would trade current levels of debt for a Fed that passively accepted deflation in the wake of the financial crisis. Fewer still would agree that sticking to a principle that says federal debt must remain low would have been worth risking another Great Depression.
Grant’s article includes a coy discussion of a return to the Gold Standard. Virtually no mainstream economist would endorse returning to a world in which each dollar is tied to a specific amount of gold. And Grant doesn’t either, exactly. He just points out that things sure were better back then.
“Sound money coincided with balanced budgets,” he writes.
However, “I don’t ask that we return to some long-lost fiscal and monetary Eden. None has ever existed, even in America. Crises and business cycles are always with us. I merely observe that sound money and a balanced budget were two sides of the coin of American prosperity.”
For reference, back in November, when Republican presidential candidate Ted Cruz advocated a return to the gold standard during a televised debate, David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, said, “It’s basically seen as nuts, and I think even most conservative economists would say that. We learned the hard way that the gold standard does not bring financial stability. We learned that it’s really bad to have a money supply that’s restricted to the amount of gold you can mine.”
Grant’s article is long on criticism, but relatively short on solutions. After citing statistics about tax avoidance and the amount of effort Americans put into tax preparation, he offers a backhanded endorsement of a flat tax: “Are we quite sure we want no part of the flat-tax idea? An identical low rate on most incomes. No deductions, no H&R Block. Impractical? So is the debt.”
He also invokes 1950s-era anti-tax activist Vivien Kellems, and urges the country to adopt a program for which she argued. Under Kellems’ plan, employers would no longer withhold taxes. Workers would be given the entirety of their gross pay, and be required to personally hand over the share the government takes.”
Although it would be wildly inefficient, the plan would have the merit of making Americans highly cognizant of the amount of money the government extracts from them in taxes, assessments, and other levies. It also has about as much chance of being implemented as...well...a return to the gold standard.
Americans would be better served if our politicians paid more attention to fiscal responsibility and to the long-term damage excessive debt can do to the country. But these are hard and complex problems that won’t be easily solved.