Federal debt, deficit and policy

The national debt has been a punching bag for almost a century, even mentioned in a song written in 1951

(“If You’re So Smart, How Come You Ain’t Rich?”) The debt stands at over $30 trillion and the alarms are sounding just as they did when it hit $5 trillion, $10 trillion, $15 trillion you get the idea.

Everyone’s hair goes on fre with each high water mark, and yet, nothing catastrophic has happened.

There is occasional talk about a “Balanced Budget Amendment” to cure this, but it’s hardly necessary and would needlessly hamstring the government. People are looking at this the wrong way and in highly simplistic terms.

Worse is the political discourse. Comparisons by Congress people referring to the debt as if it were a credit card balance or likening it to household debt are just plain infantile. But there is a mature way to look at this and a rather obvious one.

The last time we ran a surplus was in 1998 to 2001. A confuence of a strong economy and higher tax rates, among other factors, propelled revenues over the level of expenditures. We stopped issuing 30-year treasuries during this period as there was no need to run auctions to fund the government.

People were wondering aloud back then how mortgages would be priced if the same thing happened with shorter maturities that base their yields of 10-year paper.

A series of unfortunate events ended this state of afairs in short order.

First the “dot-com” market crash, then

September 11, and lastly, two poorly structured, reckless and badly timed tax cuts executed by the Bush Administration.

The rationale presented by the Administration was that “it was your money” so it should be returned as if the recession we went through at that time wasn’t enough to eliminate the surplus all by itself.

Note that no matter what, spending and revenue always go up over time. They can vary at diferent rates depending on what is going on at any given moment, but generally speaking, the economy continues to expand and so do the funding and the spending to maintain it.

The frst thing to acknowledge is that strong economies deliver stronger revenues. If a solid pace can be maintained, the gap between spending and revenue narrows. Again, nothing kills revenue like an economic downturn.

The second thing to acknowledge is that tax policy has deliberately sabotaged revenue growth below what could be considered a more “natural,” for lack of a better term, rate than what has been needed.

That is what grew the debt, and although we’ve had moments where the defcit shrank dramatically, it was never enough to pole vault over the debt threshold. But with judicious steps taken, that can be done. And to remind you, you can’t reduce the debt without frst completely eliminating the defcit frst.

There is a common theme with the tax cutters: if you do enough of it, the economy will grow and the debt will take care of itself. There is only one faw in this theory:

It is a complete fantasy, it never happened in reality and tax policy over the years has not been a major factor in overall economic performance.

No matter what the tax rate, there are dozens of levers working on the economy at any given time, and to underscore the obvious once again, a solid economy will generate solid revenue growth, and historically, tax policy hasn’t helped or hindered any outsized degree unless it’s some targeted sector like real estate, for example. So recessions come and go, employment and waxes and wanes no matter where marginal rates sit, or how capital gains are taxed.

Moreover, the tax-cutting policy sews the seeds of ever larger debt. As mentioned, spending and revenues always go up, save for the occasional disruptions that history serves up.

So if you never give revenues a chance to catch up to expenditure after the bottom falls out, it’s like dropping the baton in a foot race over and over again. You’ll just keep falling behind, and there is no way to catch up. Ever.

So this explains why we needlessly torture ourselves over the national debt, and why a few sober, simple acts of policy aimed at revenue growth would end the farce once and for all. That’s where the conversation should start. Not with an artifcially imposed debt limit, or the performative nonsense served up by the Republicans.

Donald Davret Roslyn