ValueWalk

Do we need trillion-dollar deficits?

Over the last hundred years there were three periods when we ran deficits totaling more than 5 percent of GDP – during the Great Depression, World War II, and the Great Recession of 2007-09.  It has become accepted economic doctrine that large deficits may be needed to help finance major wars and to fight very steep economic downturns.  But today, we are not engaged in a major war and our economy is at virtually full employment.

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Largely as a result of the Great Recession, we began running the first trillion-dollar federal budget deficits in our nation’s history. During recessions, government spending on food stamps, public assistance, unemployment insurance benefits, and Medicaid rises, while tax receipts decline. Because this was, by far, the deepest economic downturn since the 1930s, the deficit rose from about $160 billion in 2007 to $460 billion in 2008 under President George W. Bush, a Republican.  By 2009, largely because of Democratic President Barack Obama’s $800-billion economic stimulus program, our deficit rose to an all-time record of about $1,410 billion ($1.41 trillion). During the slow and halting economic recovery, the deficit remained above $1 trillion through fiscal year 2012.
Alarmed by our trillion-dollar deficits, the Republican-controlled Congress imposed spending caps in 2011, which remained in place until Friday, when most Republicans in both houses voted to remove them for fiscal years 2018 (which began on October 1, 2017) and 2018 (which begins on October 1, 2018).
Kentucky Republican Senator Rand Paul objected very strenuously to even temporarily removing the spending caps, and was able to stall the bill’s passage in the Senate for several hours. No one seemed able to answer the question he raised: If the Democrats’ spending under President Obama needed to be capped in 2011, why shouldn’t the Republicans’ spending under President Donald Trump remain capped in 2018?
The best that anyone could do was point out that the removal of the caps on defense spending and non-defense spending was just temporary. Yeah, right. And it’s just as easy to get the genie back into the bottle as it is to let him out.
How do economic conditions today justify a trillion-dollar deficit, while those in 2011 did not? In 2011, while we were still recovering from the Great Recession our unemployment rate was 8.9 percent. Today, we are at virtually full employment with an unemployment rate of just 4.1 percent.
In fiscal year 2019, we are expected to run a deficit of over one trillion dollars – slightly more than 5 percent of our GDP. The last time we ran such a large deficit we were still recovering from the Great Recession.
Can it be argued that we are in greater need of economic stimulus today than we were seven years ago? If trillion-dollar deficits were too high in 2011, then surely they would be too high today.
About the Author
Steve Slavin has a PhD in economics from NYU, and taught for over thirty years at Brooklyn College, New York Institute of Technology, and New Jersey’s Union County College. He has written sixteen math and economics books including a widely used introductory economics textbook now in its eleventh edition (McGraw-Hill) and The Great American Economy (Prometheus Books) which was published in August.