Home Economic Trends Washington Motto: Spend During Good Times and Spend Even More During Bad...

Washington Motto: Spend During Good Times and Spend Even More During Bad Times – Veronique de Rugy (04/24/2020)

Remember the days when I was complaining that the budget deficit was about to reach $1 trillion? Those days seem now so quaint. After three separate coronavirus stimulus bills, Uncle Sam’s deficit for this fiscal year will be $3.8 trillion.

According to the Center for a Responsible Budget, a $3.8 trillion deficit is about 18.7 percent of U.S. gross national product. Last time, the U.S. had such a high deficit as a share of its economy was during the Second World War. Also, for the record, the last time the federal government spent $3.8 trillion, adjusted for inflation, was in FY2018. Now we are borrowing that same amount in a single year.

And in reality the deficit will likely end up being even larger, says CFRB:

“These projections almost certainly underestimate deficits, since they assume no further legislation is enacted to address the crisis and that policymakers stick to current law when it comes to other tax and spending policies. The projections also assume the economy experiences a strong recovery in 2021 and fully returns to its pre-crisis trajectory by 2025. Assuming a slower and weaker recovery (but no changes in law), we estimate debt would grow to 117 percent of GDP by 2025.” 

While it has long been normal for the government to spend and to borrow more money during recessions, this habit is made much worse by the fact that we came into this recession with a $1 trillion deficit already in place. Half of this additional trillion dollars of indebtedness was accumulated by Uncle Sam since 2016 and it was during one of the strongest and longest economic booms in history.

Of course, Democrats are big spenders. They don’t make a secret of it. They do, rather unbelievably, often try to cast their preference for government expansion as a means of ramping up economic growth, but at least they’re pretty straight up about their fondness for more spending on everything except defense. (Though note this fact: since President Clinton was in office, Democrats haven’t cut the size of the Department of Defense and they have happily gone to war.)

Republicans, however, are the worst offenders when it comes to spending. Anyone who follows their actions, as opposed to their lame talking points about small government and free markets, knows that they may be the biggest spenders of all. It was obviously during the George W. Bush presidency—though it should be noted that the man was great on immigration and wanted to implement private accounts for Social Security (his Republican Congress failed him in his attempt to reform both). And it is obviously so now. During the coronavirus relief-bill negotiations, GOPers gave away the house: an insanely high unemployment-benefits expansion (an additional $600 a week as opposed to the $25 expansion under Obama during the last recession), paid leave, sick leave, cash payments, and a poorly designed small-business relief package.

While some of this spending is acceptable during this recession, Republicans really went overboard with our money. One thing on top of one another will make the recovery harder because many Americans are now getting much more money from the government for not working than they would earn if and when they return to work.

Democrats could not be happier, even though they persist in complaining in hopes of raising spending to heights even more obscene. They will probably prevail since President Trump is simply out of control when it comes to spending. To be fair to him, he never pretended he was a reformer. During his campaign for the presidency, he was honest about the fact that he wouldn’t touch Social Security and Medicare. He led the Republican Congress (which doesn’t need much help on that front!) do go along with an insanely fiscally irresponsible spending agreement with Democrats. But the ‘best’ is yet to come. As Politico noted,

“The Trump administration is already pumping hundreds ofbillions of dollars into a key health sector that it previously vowed to rein in, expanding Medicare benefits and boosting payments to state Medicaid programs by an estimated$50 billion, while promising to directly pay for coronavirus treatment for thousands of uninsured in what some experts say mirrors a single-payer system.

By the time the virus finally recedes, some health policy analysts predict, Trump will have overseenhistoric new levels of federal health spending.”

The result is debt as a share of GDP that will reach 100 percent by the end of the fiscal year, up from 80 percent in FY2020. The last time this country had a debt as a share of GDP higher than 100 percent was in 1945 and 1946. However, as soon as the war was over the debt fell quickly. I wouldn’t count on a dramatic reduction in debt as a share of GDP this time around. First, because of the explosion in entitlement spending, debt was only going to go up even during good times.

Second, as Bob Higgs explained brilliantly in his 1987 book Crisis and Leviathan, government grows during times of crisis but never goes back down to its previous size. There is a ratchet effect at play. As Donald Boudreaux puts it:

“In this richly documented work, Higgs convincingly shows that with each national crisis government power ratchets up. The crisis might be fully genuine or inflated or utterly mythical; it matters not. Whenever there prevails widespread belief that a crisis looms, people turn to the state for help. And turning to the state for help during times of crisis always results, in practice, in granting to the state new powers.”

Take one recent example. Right before the 2008 financial crisis, public debt as a share of the economy was 35 percent. It had doubled by FY2012, and it never went back down after that. The same could happen here to some extent. And that’s only one dimension of the expansion of government that is happening during this recession.

This out-of-control growth of government will have serious consequences. Over at the Mercatus Center, Jack Salmon and I have published a paper that reviews the last decade of research on the relationship between government debt and economic growth. We find that, with the exception of two studies, all find a negative relationship between government debt and economic growth. According to the empirical evidence, there is little doubt that large government debt has a negative, and in many cases an increasingly worsening, impact on the growth potential of a debt-burdened economy.

Take note, libertarians: we have our work cut out for us.