The U.S. federal government followed a balanced-budget policy for 181 years, from its first year of operations in 1789 through 1969. That policy had three components: (1) regular operations were paid for with current revenues from taxes and tariffs; (2) borrowing was reserved for wars, other emergencies such as economic depressions, and investments in national development (territory, harbors, transportation); and (3) debts accumulated for those purposes were paid down by subsequent budget surpluses and economic growth. The policy was followed imperfectly but with impressive consistency.
Beginning in 1970, the federal government shifted to a budget-deficit policy. A significant and growing share of regular operations was paid for with borrowed funds during good times and bad, in years of peace and prosperity as well as war and emergency. In the 1950s and 1960s, annual budgets had continued to vary between small deficits and small surpluses most of the time – borrowing funded more than 10 percent of spending only in the war years of 1951 and 1968 and the recession year of 1959 and averaged 3 percent of spending over the entire period.
Since then, we have run deficits in 48 of 52 years, starting small and going big. A half-century of routine deficit spending has left the government deeper in debt than ever in its history. By official measures, the debt is now $28 trillion, much more than a year of current GDP. This is said to be comparable to the peak debt of the mid-1940s, years of all-out national mobilization in World War II hard on the Great Depression. But today’s debt is much higher than it was then because of contingencies embedded in the post-war welfare state – $1.6 trillion in student loans, guarantees behind $9 trillion in home mortgages, and a shortfall of future revenues to outlays in the big entitlement programs of well over $100 trillion.
The change from a balanced-budget policy to a budget-deficit policy was a profound, quasi-constitutional transformation of American government. How did this come about, and what does it portend?
On one side of the deficit debates, advocates of balanced-budget policy often describe it as generational husbandry in action: each generation should avoid burdening future generations and should instead pay its own way and build capital for the future. In this view, our forbearers were morally upright, far-sighted builders, while we have become a nation of self-absorbed, live-for-the-moment consumers.
The shift from balanced-budget to budget-deficit policy cannot be satisfactorily explained in these terms, however. Although the balanced-budget policy was sometimes justified as protecting posterity, it was primarily a device for policing government corruption and extravagance. The ethos of balanced budgets was not handed down from on high – it was handed up from the populace.
These considerations suggest that we look beyond moral turpitude to explain the emergence of borrowed benefits. It may be that the policing function of balanced budgets has become obsolete. That the government has become a cash-flow machine for the citizenry is a new form of precommitment: our legions of benefit recipients are akin to creditors, with contracts for regular payments that transcend the cant and corruption of politics, and the politicians know it.
On the other side of the debates are the fiscal progressives. Proponents of the budget-deficit regime see deficit spending as sound policy, not only to sustain income and production during serious economic contractions, such as the Great Depression and the 2020 pandemic, but whenever output is below its potential – which is almost always. This kind of fine-tuning is said to be sustainable, and borrowing from future generations ethical, because we can be confident that future generations will be wealthier than ours, and that economic growth will often be greater than the government’s interest rate on borrowed resources. In the more radical formulation of Modern Monetary Theory, large-scale deficit spending is not borrowing from the future at all, but rather investing in the future.
The transit from balanced-budget to budget-deficit policy was, in my view, primarily the result of high affluence and high technology. By the late 1960s, the growth in incomes, education, and leisure time had generated much more widespread political attentiveness, facility, and participation than ever before. Concurrently, advances in transportation and, especially, in communications and information technologies produced breathtaking reductions in the costs of political action, a trend that accelerated in the 2000s. These developments made it radically easier to organize effective, increasingly discrete interest groups and ideological groups on the demand side of “policy markets.” In effect, politics was disintermediated by market developments that were doing the same thing to finance.
And there is ample evidence that political disintermediation has propelled the broader program of borrowed benefits. It was in the early 1970s that Congress, overwhelmed by surging demand for new spending and regulating, dismantled its structure of powerful committees and annual budgeting – a structure that had, as John Cogan and others have shown, been key to holding spending and borrowing in check. Today, most members of Congress find the very idea of budgeting strange and horrifying.
If I am right about the forces behind the fiscal transformation, it has set the stage for a long period of economic decline and zero-sum, political rancor. We may hit a wall as abrupt and unheralded as the 2008 collapse. A revival of 1970s levels of currency inflation, which may be underway today, could produce marginal corrections but at serious cost. A significant increase in interest rates – prompted by the loss of the dollar’s reserve status, the accumulation of debts so large they finally rattle credit markets, or the arrival of a major war or other crisis – could lead to precipitate benefit reductions and widespread personal hardship. Gloomiest of all is the prospect that our indebted circumstances will tempt our enemies and make war more likely.
I may be wrong, of course. My understanding of the requirements of sustainability may be mistaken. We may find ourselves in a period of prolonged, unprecedented growth in productivity and economic output, brought about by a monetary modernist spending gusher or by surprising developments in technology and society. But what seems beyond argument is that our situation is one of extraordinary risk to the nation and its citizens.