What a difference a decade makes.
Eleven years ago, the budget of the U.S. government was $236 billion in the black. Today, it’s $1.6 trillion in the red, and the national debt has nearly tripled. How did it climb so far, so fast?
Call it Deficit Attention Disorder: an irresistible urge to cut taxes and increase spending, whether or not the nation can afford it. It afflicts both major political parties, say faculty at the McCombs School of Business. Over the past 80 years, each party has relaxed standards and upped antes, making the national debt perhaps the most bipartisan program ever to come out of Washington.
“The parties keep fighting over it, but nothing’s getting done,” says Jim Nolen, senior lecturer in finance at McCombs. “Republicans were supposed to be fiscally conservative, but when they have no checks and balances, they like to spend as much as the Democrats.”
It wasn’t always so. During most of America’s first 150 years, its government ran deficits only during wartime, says McCombs finance professor Lewis Spellman. “Typically, following each war, there was an active effort to raise taxes and retire debt.”
Peacetime deficits first became popular after World War II, he says. During downturns, the government would overspend to prime the economic pump. As the economy bounced back, the nation would run surpluses and pay down its debts. It happened in 1947-49 and again in 1951, 1956-57, and 1969.
“We’re not going to solve this in a partisan fashion.”
- Tom Gilligan,
Dean of the McCombs School of Business
America’s fiscal belt loosened another notch during the 1980s. Reaganomics, which reduced taxes while expanding the military, ballooned the deficit from $79 billion to $208 billion in two years. Not to worry, said supply-side economists. Tax cuts would spur enough economic growth to wipe out the deficits.
They didn’t. Deficits stayed stubbornly high, despite a seven-year economic recovery. Some economists changed their thinking, and the notion of sustainable deficits was born. A deficit, they theorized, might be sustainable if it remained under 2 percent of Gross Domestic Product.
Spellman has another word for it. “It’s spin control,” he says. “The notion is that if you add to your debt at the same rate the economy is growing, your cost of indebtedness relative to your income stays constant. It’s not putting us under. It’s a sustainable overhead. But it would be much better not to have that overhead.”
America’s overhead finally inched downward in the 1990s, as tax increases and a high-tech boom produced its first surpluses in three decades. It helped, says Nolen, that conflict between a Democratic President and a Republican Congress kept spending in check.
But the respite was brief. After 2000, the fiscal ripples of a high-tech recession were amplified by terror attacks and tax cuts. Federal revenue sank $243 billion, while spending jumped $371 billion, much of it to pay for new Department of Homeland Security and two wars.
Revenues rebounded after 2003, thanks largely to a real estate boom. Deficits shrank to 1.2 percent of the GDP, and Uncle Sam felt flush enough to launch a Medicare prescription drug plan, with an annual tab of at least $40 billion. Economists, says Spellman, came up with another new notion: the structural deficit. It would shrink but never disappear, not even in the best of times.
The trouble was that small deficits in boom times might explode during the next bust. As the real estate bubble burst, starting in 2007, the deficit soared to 10 percent of the GDP.
Republicans blamed high spending, while Democrats blamed low taxes, says McCombs Dean Tom Gilligan. Both sides, he adds, are partly right. The years 2007 to 2009 saw a $463 billion drop in revenues, while business bailouts, unemployment benefits and economic stimulus brought a $789 billion surge in outlays.
Both trends must be reversed, he adds, to bring the deficit back to earth. He points to the president’s National Commission on Fiscal Responsibility and Reform, which has recommended both spending cuts and tax increases. If Deficit Attention Disorder is a bipartisan ailment, it needs a bipartisan cure.
“I don’t think proposals made by any one party are politically viable,” says Gilligan. “They’re only trying to gore the interests of the other party. It would be great for the commission’s recommendations to be taken up by the leadership in the Senate and the House. We’re not going to solve this in a partisan fashion.”