Bipartisan Disaster: The Federal Deficit
The fiscal year ends on September 30. We will see just how out of control the deficit is.
The more things change, the more they stay the same . . . unless they get worse.
THE SPIRIT OF '76
In 1976, Jimmy Carter ran against Gerald Ford.
Carter seemed to be an earnest Baptist layman. That was no illusion. Until COVID-19, he still taught Sunday school to busloads of visitors. His problem was that he lived in an illusory world.
On May 3, 1976, Business Week published an interview with him: "Populist Georgia-Style." The issue of the U.S. government deficit came up (p. 65).
Many people think the major cause of inflation is big federal deficits. How do you stand on the budget?We can have a balanced budget by 1980 if I'm President.
But how? More efficiency.
You're talking about more efficient government, not necessarily smaller government.That's right.
He was elected. Here is what happened to the deficit during his administration. It started at $60 billion in 1977. It narrowed to $40 billion in 1979. Then it rose to $75 billion by the time he left office in January 1981. The recession of 1980 created a fiscal disaster.
In March 1981, The Atlantic published an article on what went wrong for Carter's budget. It was written by the executive director for budget at Office of Management and Budget (OMB) under Carter. Given his role in government, he had an improbable name: W. Bowman Cutter.
In a long set of discussions in May and June 1978, the President was told in detail what a substantial reduction in the deficit would entail. We would have to reduce the tax cut the administration had already proposed--requiring immediate discussions with congressional leaders. His promise to provide growth above the rate of inflation for the defense budget had to mean even worse prospects for the domestic budget. No new programs of any significant size could be proposed. Existing programs for the cities, for transportation, for the environment--programs that already provided benefits, and had clients and constituents (most of them Democrats)--had to be held down or cut back. Legal changes would have to be proposed to Congress to permit reductions in such untouchables as Social Security and Medicare. Federal operating costs would be reduced, federal salary increases would be limited, federal hiring would be restricted.No one was under any illusions about the difficulty of this effort for this President. In June 1978, Jimmy Carter was not particularly popular. But any President would have had an extremely tough sale on his hands. Conservatives would be pleased with the direction the President was taking, but displeased with its moderate quality, its necessary concessions to other points of view. On the other hand, much of the Democratic party--where the President had to look for support--would despise the entire effort.
He tried to buck the Democrats in Congress. He failed.
Reagan did the same thing as a candidate. He imitated Carter.
Even Ronald Reagan--who ran against the federal government--followed the same pattern. During his campaign he committed himself to expenditures and tax cuts as if he were a liberal Democrat. He supported bilingual education, guaranteed loans for the Chrysler Corporation and New York City, increased Social Security, federal employee pensions indexed to inflation twice a year, increased support for the National Maritime Administration, and the largest tax cuts in history. But he chose, predictably, not to identify the programs he would cut, relying instead on the familiar promise to cut waste.
Reagan did not foresee the recession of 1981-82, the worst in the postwar era until 2008/9.
THE GORDIAN KNOT
The author then went on to describe the process. This is as accurate as any I have ever read.
The budget process encompasses every major actor in the political system. The budget that emerges annually from this process is an extraordinarily complex crystallization of agreements among institutions, competitors, interests, and philosophies. I believe that its current size and built-in rate of growth raise serious problems; its structure is inappropriate; its allocations of resources are increasingly wrong; and the process that determines it yields self-canceling decisions. But having managed the preparation of five budgets, I'm disturbed by a tendency to underestimate its complexity and to depict changing it as relatively easy. To listen to most political discussions of economics or the budget is to come away with the sense that the federal budget can be changed easily by cutting fraud, waste, and bureaucrats, and that our current situation is one a malevolent government created against the will of the American people.Reality is different. The budget represents commitments made over decades. Those commitments will not be changed without significant conflict. Of course, some fraud and waste occur in federal spending. But normally the term "waste" denotes someone else's program. As a senior Defense Department official once said about the defense budget, "At least we don't piss it away on welfare." And finally, despite public mythology, the budget achieved its present state with the knowledge and active connivance of the American people.
Every federal program has numerous supporters, is passed by Congress, and is signed by a president. Very few are repealed.
I have pointed to the cost of Social Security (25%) and Medicare and Medicaid (25%). I have said that these percentages grow slowly. Here was what they were in 1981.
About 45 percent of the total budget consists of required payments to individuals--Social Security, Medicare, military pensions; 30 percent consists of interest payments and long-term contract commitments--water projects, naval ships, solar energy demonstrations or public buildings; and all annual discretionary spending--funds that could actually be reduced in any particular year--makes up the final 24 percent.
So, about 75% of the budget was already spoken for in fiscal 1981. How about in 2015?
Today, there is far less discretionary spending possible than there was in 1981. It's around 16%, not 24%.
Republicans may worry that there's going to be a wave of spending on the welfare state. To the extent that the welfare state is defined in terms of money sent out to people who have lost their jobs because of the lockdowns, there is likely to be an increase. This has been a bipartisan decision this year. There has been no spending program this large in postwar American history that has had greater bipartisan support. That is why we are running a fiscal deficit of $3.3 trillion.
The public is overwhelmingly in favor of these bailouts. Every poll that has been taken this year indicates that the support is in the range of 70%. Even among Republicans, support is in the range of 65%. Here is a Gallup poll taken in August. It doesn't matter who wins the election this year. There is going to be bipartisan support for a bailout of unemployed people. That's where most of the discretionary spending is going to go.
Where will the money come from? Probably from investors in the private sector, but also from the usual sources: federal retirement programs of various kinds. If it looks as though the economy is headed deeper into recession, the Federal Reserve will probably start buying hundreds of billions of dollars of federal debt. It may even buy $1 trillion worth of federal debt.
CONCLUSION
There is not going to be any wave of spending to nationalize the economy or create Medicare for all. Bernie Sanders' proposals were always pixie dust, just like Carter's promises of government efficiency in 1976.
The nation is talking about a coup d'état after November. The Democrats say that Trump will do this. Republicans say that Biden will do this.
This is going to be great political fun. This is going to be a real Punch and Judy show if the election is close.
Rhetoric is at stake. Even more important, poking an electoral stick in the eye of the ruling class is at stake. Trump's reelection will send the ruling class into pure apoplexy. For the next four years, they will be beside themselves in fury. That would be great fun to watch. But to imagine that there is anything economically substantive at stake here is to believe in the reality of pixie dust.
There is a real disaster looming. It is a bipartisan disaster. It is the ratchet upward of the federal deficit, which is not going to go back to anything as mild as $1 trillion a year in the next President's term.
Jimmy Carter lived to see it get here.