In 1959, President Dwight D. Eisenhower attempted the single boldest peacetime experiment with fiscal policy in American history. With the economy slipping into recession, Eisenhower ran a budget deficit of over $12.8 billion.
This was a lot of money at the time. Adjusted for inflation, it was more than double the size of the deficits that Franklin D. Roosevelt ran in the late 1930s as he tried to lift the economy out of the Great Depression.
But not many people got worked up about Ike’s suddenly spendthrift ways. Economists expected the deficit to boost jobs and restore growth. It did both, and presidents have been deploying similar strategies ever since. Richard Nixon ran deficits of over $23 billion in consecutive years, which, adjusted for inflation, amounted to about a 10 percent bump on Eisenhower’s tab. Gerald Ford pushed the deficit to over $73 billion, and Ronald Reagan grew it to more than $221 billion. George H.W. Bush’s biggest deficit was about $290 billion; his son’s biggest deficit was over $377 billion.
The Republican Party hasn’t governed as if it cares about government spending or budget deficits in over 80 years. What is surprising about President Donald Trump’s latest proposal to run a $900 billion-plus annual deficit into 2022 isn’t the red ink itself, but the blunt acknowledgement of it in his official budget plan.
Sure, Republicans screamed from the rooftops that President Barack Obama’s stimulus package and health care reforms would bankrupt the nation. And yes, some excessively credulous Washington journalists presented the dire warnings about federal debt and deficits from then-House Budget Committee chair Paul Ryan (R-Wis.) as serious policy ideas. But the crisis never materialized, and nobody familiar with the way Republicans have governed historically took Ryan ― who had voted dutifully for George W. Bush’s spending and deficits ― at his word.
The truth is, nobody in Washington who actually exercises power cares about the deficit. Leaders of both parties understand it as a rhetorical tool ― an ostensibly objective number that can be deployed to help resolve a genuine divide over values. When House Minority Leader Nancy Pelosi (D-Calif.) and Sen. Patty Murray (D-Wash.) talked about immigration reform during the Obama years, they sometimes pointed to the impact on government resources: A path to citizenship for the undocumented would lead to more people paying income taxes, which would reduce the deficit. More frequently, Ryan would fret that the country was on the verge of a “debt crisis” if it didn’t immediately cut Medicaid and Medicare.
In both cases, the central question ― should our society treat its people with basic human decency? ― was sidestepped in favor of a question about whether we could afford to treat people with basic human decency, or afford not to. This was a silly exercise for leaders of the richest country in the history of rich countries to engage in, but it has become a standard Washington ritual.
Which is a shame, because the deficit doesn’t really matter ― at least not in the way that politicians pretend to believe that it does. The federal government cannot run out of money. Unlike a household, the government can print money when it needs it. If the deficit gets too big, we won’t see a sudden financial market crash like we did in 2008. Large deficits won’t prevent the government from paying its bills. There isn’t even recent empirical evidence that running a big deficit makes worried investors demand higher interest rates on government bonds to compensate for their increased risk. Since the George H.W. Bush presidency, interest rates on bonds have steadily declined, while government debt has steadily increased.
What persistent large budget deficits can do is create inflation, by forcing the government to pump more money into the economy than workers and businesses can reasonably soak up with increased productivity. When this happens, prices rise.
Heavy inflation isn’t great. It erodes savings and makes it harder to plan a family budget in the face of rising prices. But it’s not a sudden crash or calamity of unknowable proportions ― it’s something governments know how to deal with by restricting the amount of money in the economy.
And what’s more, we don’t see much evidence of imminent inflation right now. The Federal Reserve has set a 2 percent annual increase in prices as its goal for several years, and we have persistently undershot that figure. There seems to be plenty of room for additional deficits right now.
Even if the evidence of looming inflation were strong, how the government actually goes about creating deficits matters at least as much as the size of the deficit itself. Building a high-speed rail network that people actually used would make transportation more efficient and help a host of other businesses that rely on speedy transport. This spending would translate into more economic activity rather than simple price increases. Growing the deficit by cutting taxes for the super rich, by contrast, cuts the other way, giving people who already have more money than they can spend extra cash to bid up prices.
Democrats who don’t like President Trump’s policy priorities don’t need to scream about the deficit to make their point. The budget document he published on Monday is pretty clear about what he thinks government should and should not be doing: He wants to slash Medicaid by $250 billion and food stamps by over $200 billion, cut public education funding and dramatically reduce taxes for the wealthy, while pouring more money into the Pentagon and charging people more to immigrate here. His infrastructure plan includes just $200 billion in actual spending, along with about $240 billion in cuts to existing infrastructure programs and proposals to “streamline and improve” privatization of public assets.
The central questions for all of these policies don’t have much to do with their real long-term financial costs. Nobody in their right mind thinks creating a few extra points of inflation matters next to civilian deaths and global stability.
Deficits are only scary if they threaten an amorphous crisis of unknowable proportions. They don’t.