There is a lot of angst around the country just now regarding the prospects for the medium-term economic outlook. In that context, the Washington Post is carrying an Op-Ed by Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and former advisor to Vice President Joe Biden, who writes that the large and growing budget deficit for FY 2018 of $779 billion is a huge jump over the prior year’s level and a particularly large deficit considering the strong underlying economy.
Bernstein says that the Trump administration, with its tax cut, has broken a key fiscal function. In the past when employment was high tax revenues as a share of the economy were expected to rise significantly, deficits were expected to fall. Instead, revenues recently have gone way down, and deficits have climbed.
He argues that this is primarily because the recent tax cuts have significantly cut the amount of federal tax revenue being spun off for any given growth rate. Increased spending also played a role, he says, but “not as large a one as the tax cuts.” If this sounds out of sync with Republican claims that “tax cuts will pay for themselves,” that’s because it is. They don’t … never did … never will, he asserts.
Bernstein presents data back to the mid-1940s and calculated the average deficit as a share of GDP. In every year since the late 1940s when unemployment rate was at or below 4.5% (it’s currently 3.7%) the average deficit was 0.4%, as opposed to the 3.9% for 2018.
This shows, he says, a shift in the heretofore “tight correlation between deficit and unemployment rates.” For example, he notes that in both fiscal 2000 and 2018, the unemployment rate was 4%. In 2000, the strong economy teamed up with the structure of the tax code generated revenues to the Treasury of 20% of GDP. This year, that share fell to 16.5%.
Bernstein expects that advocates of the tax cuts will point to the difference in the spending between the two years, but uses projections by Congressional Budget Office to compare the two periods. The CBO projected in the summer of 2017, before the tax cuts and this year’s spending deal, that we’d spend 20.5% of GDP this year, almost exactly what happened (20.3%). But CBO also thought, ahead of the tax cut that we’d collect 17.7% of GDP in revenues when the actual was, as shown, 16.5%. This diminished revenue figure is the key difference between what CBO expected then and what occurred, he says.
He sees this difference as highly important. Based on our aging demographics alone, we will need more revenue over the next decade, not less. Add in geopolitical threats, climate change and the damage from increasingly intense storms, infrastructure, the need to push back on poverty and inequality, as well as counter-cyclical fiscal policy that will be needed for the next downturn and he concludes that “it’s not hard to understand why a rising deficit at full economic capacity is so ill-advised.”
These observations lead him to conclude that it is necessary to take steps to claw back the lost revenue, as well as to look for reasonable savings on the spending side.
He thinks this will be hard, given claims from administration officials who believe that expected strong economic growth, combined with proposals to cut wasteful spending, will lead America toward a sustainable financial path. He calls that “magical thinking” and also argues that the red ink we learned about this week is merely the beginning of a tide that will only, absent corrective action, get larger.
Here it seems we have the basis for an intense debate, both between the parties and within them. The administration wants a bustling economy and it seems completely unwilling to be deterred by implications of growing deficits and debt.
At the same time, many of the Democratic contenders are proposing large, strong government programs to do many things and have been willing to argue that “modern economics” leads to less prominent concerns about debt levels and deficits—although their spending priorities are very different than most of those proposed by the administration.
That raises the question of who will focus on the debt, and whether that concern will—or won’t—constrain ambitions for government programs, given the many, many concerns regarding urgent public needs. It still seems that debt worries have not disappeared entirely, and that possibly Bernstein’s former link to a top democratic contender may mean new policy efforts from that direction.
So, we will see. The Post carried the Bernstein note but did not weigh in on the intensity and potential political impact of the debt issue—or of its absence. Nevertheless, this is a fight that can be expected to emerge at some point and which should be watched closely by producers and others as it does, Washington Insider believes.
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