The growing US deficit: It’s a revenue, not a spending problem

The national debt is growing, but despite what Trump and his party say, spending less will not solve the problem.

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The US federal budget deficit rose in fiscal 2018 to $779bn, $113bn or 17 percent higher than the previous fiscal period, according to a statement from the Trump Administration [Reuters]

The deficit just hit $779bn for the last fiscal year.

The national debt is $21 trillion and growing.

Do you care about deficits and debts? It’s a subject that brings up a multitude of significant issues. The financial health of the nation. Politics. Lying. How peculiarly distant from reality so much of economic theory is.

Here’s the most significant thing to know about the current version of government debt and deficits: it’s not a spending problem, it’s a revenue problem.

Isn’t it caused by government waste? Boondoggles? Welfare? Especially from entitlements! Social Security! Medicare! Medicaid!

No. It’s a revenue problem.

It’s not terribly instructive to look at debt and deficits in straight-up nominative terms. It’s much better to measure debt in relation to earnings because earnings are the way it gets paid back. If someone who makes $10,000 a year, has a personal debt of $100,000, it is probably quite problematic. If someone who makes $10,000,000 a year has the same debt, $10,000, it will probably disappear as soon as they pay their most recent Amex bill.

US debt as a percentage of the gross domestic product (the nation’s earnings), shot up during World War II, then peaked in the immediate post-war years, at 120 percent. From then on, it headed down in a steep and mostly steady trajectory. In the ’50s, in spite of the Korean War, it got down to about 65 percent of GDP. In the 1960s, during the Lyndon Johnson years, when Medicare and Medicaid got started, Social Security was increased, the war on poverty was launched, and the real war in Vietnam was escalating, it continued on down to about 40 percent of GDP. It began levelling out under Nixon, had a slight uptick under Ford, and down again under Carter to near just 30 percent of GDP.

Then came Ronald Reagan. It was Morning in America again. For debt. Tax cuts, tax cuts, merry tax cuts! The debt, as a percentage of GDP more than doubled under Reagan and Bush.

Clinton came next. He raised taxes. The result was exactly, logically, and mathematically what you would expect. Revenues rose! The deficit declined. So significantly, that the conventional wisdom was that deficits were done with and America’s debt crisis was over. Ahh! An almost universal sigh of relief.

Then along came Bush. Bush the younger, the lesser, the second. New tax cuts! The deficits shot up. Surpassing even the great morning in America for debt that had been accomplished by Ronald Reagan! Wow!

Didn’t the debt keep going up under Obama!? Hugely! More than under any other president?

Yes, it did. But Obama couldn’t end the Bush tax cuts. So he was using the same reduced rates to get revenue from an economy that had shrunk after the crash of 2008 and the onset of the Great Recession. He also had economists with advanced degrees who told him to never raise taxes in a recession and that tax cuts would stimulate the economy. Obama added more tax cuts, though targeted more at the middle and less towards the top.

As a matter of actual history, after the bubble-crash-Great Depression sequence of the 1920s and 1930s, and after the bubble-crash-recession sequence of the late 1980s, recovery came about after tax increases. The bubble-crash-recession sequence of the early 2000s, had been met with a tax cut. The recession continued. There was a second tax cut, the recession continued for most of the economy with a new set of bubbles at the top for Wall Street, real estate, and banking.

Tax cuts for the rich primarily create greater income inequality – a wealth transfer upwards – along with increased deficits and debt. Not genuine economic growth. Even tax cuts aimed at the middle are far less useful than economists thought they would be. The combination of Bush’s continued cuts with Obama’s new ones, had the twin results of all the gains of the recovery went to the top 10 percent or higher and the debt rising ever higher.

In 2014, Obama finally got to raise taxes, however slightly, on the rich. Revenue rose! Deficits and the debt reversed direction at last and began to decline. The recovery finally made its way into the real economy as signalled by a rise in the median wage.

These facts are easily found. Unless you’re an economist, then, like a mule wearing ideological blinders, you can’t look past the twin ideas that tax-cuts-grow-the-economy and tax-hikes-take-money-from-the-economy and see what’s growing off your well-trod road over in the fields of reality.

So here we are with Donald Trump. He jammed through new Republican tax cuts. With the fervent support of all but 12 Republican congressmen.

Trump claimed that his tax cuts were for everyone, not just the rich and that they would grow the economy so hugely that they would pay for themselves. Those were the same claims made long ago by presidents Coolidge and Hoover and more recently by Reagan and by Bush the Lesser. (Bush the Elder, quite correctly called it Voodoo economics. Though he stopped saying so as Reagan’s running mate and successor, he obviously never stopped believing in reality, as evidenced by his tax cuts to fix the deficits he inherited.)

One of the great things about Trump is that he lies so often and so blatantly, that he has changed the predisposition to believe, to a predisposition to disbelieve. There has been a quick recognition that his tax cuts will not create the promised growth, will not pay for themselves, and are of benefit to a very narrow segment at the top of society.

This has not stopped Mitch McConnell from claiming it’s a spending problem. From relishing the deficits he’s done so much to create by decreasing revenue, because he’s now claiming that the problem is spending and next we must go after Social Security, Medicare, Medicaid, and the Affordable Care Act.

You may have noted, at the start of the article, that America’s debt/GDP ratio peaked in WWII. If we look at it as spending on survival and then in becoming the only modern industrial nation left standing, it was a great investment. Businesses are constantly borrowing in order to grow. Even our poor friend, making but $10,000 a year with a $100,000 debt, might have made a sound choice if it’s a home mortgage with payments he can afford on a property increasing in value. It is important to consider what the debt buys us. With Trump tax cuts we found out almost instantly: stock buybacks and other utterly non-productive transfers of wealth to the already rich.

The first and most important thing to remember is that for nearly a half a century, the problem of debt and deficits has been, and remains, a revenue problem. 

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.