Why US Deficit Spending Is Out of Control
Why Government Leaders Continue to Deficit Spend
Deficit spending is when purchases exceed income. It happens to individuals and businesses, but it usually refers to governments. Governments have strong incentives to spend more than they take in and few reasons to balance the budget.
When government spending exceeds government revenue, it creates a budget deficit. Each year's deficit is added to the sovereign debt. There is a difference between deficit and debt. An unbalanced budget on the expense side for the fiscal year incurs a deficit. The failure to pay or make up for this imbalance or deficit becomes a debt or loan.
Deficit spending is not an accident. The president and Congress intentionally create it in each fiscal year's budget. That's because government spending drives economic growth. For example, the government buys defense equipment, medical supplies, and buildings. The businesses it contracts with hire people. The government hires people directly. Its spending is a crucial component of gross domestic product.
Deficit spending is part of expansionary fiscal policy. Job creation gives more people money to spend, which further boosts growth. Tax cuts are the other tool to expand the economy.
The opposite is contractionary fiscal policy. That is when the government spends less than it receives in revenue to achieve a balanced budget. Contractionary policy also includes tax increases.
There is a more powerful cause of deficit spending. Politicians get elected for creating jobs and growing the economy. They lose elections when unemployment is high and when they raise taxes.
U.S. Deficit Spending
Most people blame deficit spending on entitlements. To some extent, that's true. Social Security, Medicare, and Medicaid cost $2 trillion a year. Those payments consume more than two-thirds of the revenue received each year. But payroll taxes cover 100% of the costs of Social Security and 50% of Medicare's costs.
This mandatory spending must be paid to legally fulfill the acts of Congress that created them. Congress must pass another Act to amend or reduce them. This is rarely done since millions of current beneficiaries will have their incomes reduced.
Recessions cause deficit spending in order to end them. For example, Congress passed the $787 billion economic stimulus package in March 2009 to end the 2008 financial crisis. It paid for extended unemployment benefits and public works projects.
Most people don't realize that wars create more deficit spending than recessions.
For example, President Franklin D. Roosevelt only increased the deficit by $3 billion a year to fight the Great Depression. He spent around $50 billion a year to fight World War II. If FDR had spent as much on the New Deal, he would have ended the Depression. If the global economy had improved sooner, then perhaps World War II could have been avoided.
The attacks on 9/11 increased deficit spending more than the Great Recession. The War on Terror drove military spending to new heights. The War in Afghanistan cost $28.7 billion in 2001. The War in Iraq drove overseas military costs up to $72.5 billion by 2003. By 2008, total costs grew to $186.6 billion. That is in addition to annual budgets for the Departments of Defense, State, and Homeland Security.
Deficit spending under President Barack Obama escalated. He had a reputation as a "peace" president. But he didn't reduce military spending. His first year in office, he increased it to a record $816 billion. He kept it above $800 billion a year until 2012. He lowered it to around $750 billion annually through 2016.
President Donald Trump is no slacker when it comes to deficit spending. He has added $1 trillion to the debt each year he has been in office.
As projected in the FY 2019 budget, Trump plans to add $4.775 trillion to the debt by the end of his first term. That's a 29% increase from the $20.245 trillion debt at the end of Obama's last budget for FY 2017.
Until 2016, the United States could afford deficit spending because the interest on the debt was so low. One reason was that China, Japan, and other countries demanded U.S. Treasurys. But that began to change in late 2016 as the economy improved. They were still the largest foreign owners of the U.S. debt, but their appetite has slackened.
Deficit Spending and the Debt
Deficit spending should only be used to boost the economy out of a recession. When the GDP growth is in the healthy 2% to 3% range, Congress should restore a balanced budget. Otherwise, it creates a frightening debt level. When the debt-to-GDP ratio approaches 100%, owners of the debt will become concerned. They worry that the county won't generate enough income to pay the debt.
But attempts to lower deficit spending created conflict within Congress. They
argued over which programs should be cut. In 2013, tea party Republicans shut down the government over this issue. They also hinted Congress would allow the United States to default on its debt in 2013 and in 2011.
The Bottom Line
Deficit spending is intentional. Congress and the president know that it's a sure-fire way to get reelected. Those who benefit from tax cuts and increased spending become loyal constituents. It won't change until voters punish leaders who overspend.
But the result is debt that's greater than the economy's ability to pay it off. Interest payments on the debt consume 10% of the budget. As a result, Congress is caught between a rock and a hard place. This dilemma will only worsen as interest rates rise.