Observations About the Federal Deficit

My Comments: Arguments about being debt free have been with us forever. For those of you who understand economics and finance, there’s a need to differentiate between debt as a micro-economic vs macro-economic issue.

On a personal level, the micro-economic level, we live finite lives. What we owe or don’t owe, significantly influences how we live our lives and the level of pleasure we get from being alive.

On the macro level, there is no finite time frame. Debt still influences how we live our lives, but it’s hardly ever personal. Yes, our tax bills might be higher, both at the local and national level, but at a day-to-day level, our lives are not noticeably different.

To the extent we want the lives of our children and grandchildren to be happy and rewarding lives, we do need to pay attention to the Federal deficit. That means the amount we owe others for the money spent by the Federal government. It happens at the State level too, but that’s beyond the scope of these comments.

One flaw in what follows from Ms. Rampell is her suggestion that more people signing up for Social Security and Medicare increases spending. Not necessarily. By law, Social Security cannot contribute to the federal deficit, because it can only pay benefits from its trust funds.

Don’t let the fiscal hawks persuade you that paying Social Security benefits contributes to the macro-economic debt of the United States.

By Catherine Rampell \ The Washington Post Oct 17, 2019

The GOP’s fiscal hawks have finally flown the coop.

Last week, the Congressional Budget Office released its latest estimate for the federal budget deficit for the fiscal year that just ended. Lo and behold, the deficit likely reached nearly $1 trillion — $984 billion, to be precise.

This was the largest annual deficit in both raw dollar terms and as a share of the economy since 2012, when we were still recovering from the aftermath of the financial crisis and ensuing Great Recession. It was also a huge jump from where it was when President Trump first took office; the deficit is up by 26% since fiscal 2018 and a whopping 48% since 2017.

This is not what either Trump or others in his party told us to expect under Republican leadership. For years, the GOP cast itself as the party of fiscal responsibility, fighting tooth and nail against virtually any Obama-era expense even when the struggling economy desperately needed more fiscal stimulus.

When he ran for president in 2016, Trump promised to not only shrink deficits but to actually eliminate the entire federal debt — that is, to pay down all the accumulated deficits we’ve had over the years, which now add up to about $23 trillion.

The King of Debt’s promise to wipe out government debt was always nonsense. But reducing deficits? That seemed at least theoretically possible.

We’re more than a decade into an economic expansion, after all. For most of the postwar period, when unemployment was low, budget deficits fell or even flipped into surpluses.

That’s because a strong economy usually means much stronger tax revenue. It also typically means less need for safety-net services such as food stamps or unemployment benefits, and therefore less overall government spending.

In the past few years, though, the health of the economy and the health of the budget have decoupled. In fact, fiscal 2019 was the fourth consecutive year in which the deficit increased as a percentage of the economy, despite falling unemployment.

So what went wrong?

To be fair, the country is aging. That means more Americans enrolling in Social Security and Medicare, which of course swells spending.

But even aside from this demographic change, our political leaders, corralled by Trump, have made things appreciably worse through their policy choices.

A political leader who’s serious about curbing budget deficits would propose actual fixes — including unpopular or painful ones, such as spending cuts or tax hikes. Instead, Trump decided

to go on a tax-cut-and-spending- hike spree. He wished away the predictable deficit consequences with promises of turbocharged growth that hasn’t materialized.

We had a brief sugar high in growth last year. Now we’re reverting to annual rates in the mid-2% range, which is still respectable. Because Republicans slashed tax rates, though, Treasury coffers haven’t benefited much from the continued expansion.

Even rising tariff revenue — which, despite Trump’s claims to the contrary, are taxes paid by Americans — won’t make up the difference. In other words: No, tax cuts aren’t paying for themselves. The CBO estimated that the GOP tax cut would actually leave deficits over the next decade nearly $2 trillion larger than they would have otherwise been had the tax system stayed the same.

Meanwhile, federal spending has grown — and not just on the growing legions of elderly Americans. Defense and other areas of discretionary spending have also shot up under Trump’s presidency. So have interest payments on the debt, even as interest rates have fallen.

There’s nary a peep about any of these trends from politicians of either party. Don’t expect one anytime soon— at least not until there’s a Democrat back in the White House, when we can expect all those Republican fiscal hawks to abruptly fly back home.

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