The Problem: Chronic Deficits
The United States has entered a new period in which sustained budget deficits have become afact of modern American politics. Our budget deficits are surpassed only by those accumulatedduring World War II, as a percentage of the gross domestic product.
Yet unlike the temporarydeficits that resulted from emergency efforts to win the war, the deficits of the late 20th and early21st centuries have persisted year after year and reflect decisions made by Congress regardingthe regular operations of government.The period beginning in the early 1970s, when the modern budget process was firstimplemented, and ending in 1997, when Congress balanced the budget, represents the longestperiod of consecutive deficits on record. Moreover, the period beginning in 2002, when deficitsreturned after four years of surpluses, appears on track to surpass its predecessor.
Indeed,deficits that far exceed those accumulated over the last 25 years are projected to continue wellinto the future. Such forecasts have led some
to label the current period the “
age of deficits
The persistence of such deficits and the recent, dramatic increases in their size are indicationsthat the nation is currently on an unsustainable fiscal path.
The current path is “unsustainable”
because, absent fundamental spending reforms, these deficits will only grow both in absoluteterms and, more problematically, as a percentage of GDP. In addition, the debt that results fromannual deficits will increasingly cause slower economic growth, higher taxes and less security.Increased government spending means a reduction in the amount of private investment andhigher taxes on the American people, which leads to a lower quality of life for all. Massivebudget deficits will also eventually reduce the resources available for national defense andsecuring the homeland.A continuation of the current fiscal policy increases the possibility of another crisis, but this timeit may be much worse than the great recession in 2008. On the current trajectory, a fiscal crisiswould likely be accompanied by a collapse in the value of the dollar, a dramatic increase ininflation and interest rates, and perhaps even a failed Treasury auction as lenders lose confidencein the creditworthiness of the United States. Such events would seriously damage our economyand would destroy jobs.The current situation is a result of a massive increase in government spending over the lastdecade. This year, government spending totaled 24 percent of GDP, twice the level of the NewDeal when the government took dramatic steps in a failed attempt to end the Great Depression.Even more troubling, total federal spending has doubled in the 10 years since 2000, leading toever-increasing annual budget deficits.
In current dollars, the highest war-time deficit was $54.6 billion (30.3 percent of GDP). The total amountof deficit spending from 1941 to 1945 was $175.2 billion. Deficits as a percentage of GDP during this period rangedfrom 4.3 percent in 1941 to 30.3 percent in 1943 and 21.5 percent in 1945. In contrast, the deficit in 2009 was $1.4trillion (9.9 percent of GDP). The total amount of deficit spending from 2005 to 2009 was $2.598 trillion, anddeficits as a percentage of GDP during this period ranged from 2.6 percent in 2005 to 9.9 percent in 2009.