Wednesday, January 15, 2020

The Era Of Trying To Cut Federal Government Spending Is Over

Why is the era of trying to cut federal government spending over?  The answer lies in the large number of zeros attached to the federal budget deficit, just the deficit itself, not total government spending.

The federal budget deficit for 2019 is estimated to exceed one trillion dollars ($1.092 trillion).  One trillion in words spelled out doesn’t look so bad.  Putting in numbers gives a wholly different look:  $1,000,000,000,000.00.  That’s a lot of zeros.  Per day, it comes to $3,000,000,000.00, also a lot of zeros.

Suppose some Members of Congress actually believe in cutting government spending and introduce legislation to that end.  Suppose further that any one measure, if enacted, would save several million dollars or several tens of millions of dollars.  Suppose even further that these members compile legislation that cuts spending by several billion dollars, no small achievement in the face of political pressure to increase spending.  Cutting spending by $3 billion amounts to a mere one day less of federal borrowing to finance the annual budget deficit, barely if at all noticeable.

What’s the point, really?  Why incur the wrath and enmity of your colleagues in Congress to have such little impact on government spending?  Perhaps virtue-signaling to get reelected in your district?  But the hard truth is almost nobody cares about budget deficits, certainly not now, especially in world of low real interest rates!

How Did This Happen?

Return with us to those thrilling days of yesteryear when the federal government ran a series of budget surpluses.  Bill Clinton was elected president in November 1992.  The budget deficit was $290 billion.  In November 1994, the Republican Party, led by Newt Gingrich’s Contract with America, won the House of Representatives.  Together, they enacted tax and spending measures that sharply reduced the deficit to $163 billion in 1995, $107 billion in 1996, and an almost inconceivably low $22 billion in 1997, the smallest deficit since 1974.

Then followed a string of budget surpluses:  $69 billion in 1998, $125 billion in 1999, $236 billion in 2000, and $128 billion in 2001.  Economists began expressing concern that sustained surpluses could pay down the national debt in full.  In particular, how would the Federal Reserve conduct monetary policy if there were no Treasuries to buy and sell?  Would it have to buy and sell corporate debt, or what?

That concern evaporated in short order as President Bush launched wars in Afghanistan in 2001 and Iraq in 2003.  In the years 2002-08, the deficit was successively $158 billion, $378 billion, $413 billion, $318 billion, $248 billion, $161 billion, and $459 billion.  Under Bush’s regime of two wars, the federal debt doubled from about $5 trillion to roughly $10 trillion.  So much for running out of Treasuries to conduct monetary policy!

On their own, Bush’s wars were bad enough for fiscal policy.  But under his watch (and that of his fiscal and economic advisers), the great financial crisis of 2008 erupted.  I vividly recall news reports of President Bush warning inside a raucous White House meeting on September 25, 2008, that if Congress did not approve a bailout package, “If money isn’t loosened up soon, this sucker [the U.S. economy] could go down.”

Out went Bush and in came President Barack Obama.  Obama inherited a crashing financial system and economy that sharply cut tax revenues and drove up spending on automatic stabilizers (social spending).  It was impossible to curtail spending in those circumstances.

As the economy recovered, the rise in tax revenues gradually reduced the deficit from $1.4 trillion in 2009 to $442 billion in 2015, a decline of 70%.

That was that.  Donald Trump eked out a victory over Hillary Clinton in November 2016 with small margins in key states.  A combination of increased defense appropriations and tax cuts produced deficits of $665 billion in 2017, $779 billion in 2018, and an estimated $1.091 trillion in 2019 (the last year with the support of the Democrat-controlled House of Representatives).

Some economists want to assign blame for deficits to ever-increasing entitlements and warn about the potential danger of a $21 trillion public debt should interest rates spike up.  No amount of research and public policy dissemination on these problems will make any difference.  Almost nobody is complaining about the $2.155 trillion in defense appropriations during 2017-19. 

2020

The 2020 campaign is in high gear.  The leading Democrat candidates are proposing trillions in new government spending and some, but not enough, additional taxes to cover costs.  President Trump’s key economic advisers are talking about a new middle-class tax cut for his second term.  The Federal Reserve says it sees no likely changes in interest rates during 2020.  Trade deals with China, Japan, Korea, and the new NAFTA, the USMCA Trade Agreement, should keep the U.S. economy humming along nicely in 2020.

Trump’s reelection does not imply meaningful cuts in government spending (hence reduced deficits).  A Democrat president in 2021, especially with a Democrat Congress, implies more spending, repeal of some or all of the 2017 Trump tax cuts, and who knows if and when the current business cycle will end with an economic downturn, maybe even the dreaded “R” word.

Economists blew the 2008 financial crisis.  They are not likely to predict the next downturn correctly either.

Whatever the election outcome, don’t expect a serious effort on the part of your elected officials to make a serious effort to cut spending.  It ain’t gonna happen.

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