The other angle to consider is the politics of deficit reduction. If one looks at US budget deficits as a share of GDP from the 1970s to 2017, there are three instances of multi-year reductions—under Carter, Clinton and Obama.
Now that might be circumstantial rather than causal, and fiscal legislation is passed by Congress, which in many of those presidencies was divided or controlled by the GoP. Even so, matters did look different when the GoP sat in the White House, so one must wonder.
But the more important point is this: In each of those multi-year periods of deficit reduction incumbents (or their successors) reaped little, if any, political reward for their achievements. Indeed, successive Administrations (Reagan, Bush II, Trump I) happily and mostly politically successfully presided over expanding deficits (as a share of GDP) that one might argue were ‘politically financed’ by the previous administrations’ politically un-appreciated fiscal rectitude.
So while it is correct to be dismayed about how the fiscal sausage is made in Washington, DC, perhaps we must also acknowledge that we, the American people, are ultimately responsible. If election outcomes reward the politics of low taxes and high spending, then maybe we shouldn’t be all that surprised to see little progress on deficit reduction?
Which underscores your opening point, namely that we need a serious discussion about deficits.
On your point on multi-year deficit reduction, I don't think it's circumstantial, it is incorrect.
You are right on Clinton, but not on Carter and Obama. For Obama, to be fair to him we need to ignore his first term, when in response to the GFC he ran an average deficit of 8.4% of GDP, much larger than even today. But even in his second term the deficit average 4.0% of GDP, more than twice as large as under the preceding W Bush tenure.
Under Carter the deficit averaged 2.4% of GDP. Very reasonable, but 50% larger than under the Nixon/Ford tenure (1.6% of GDP).
And that is why, so far, Republicans have had a much stronger reputation on fiscal responsibility.
During the first three years of Trump I, before Covid hit, the deficit averaged 4.0% of GDP, exactly the same as under Obama's second term; so I think Trump benefited from the impact of his pro-growth reforms rather than of larger deficits.
Now, on your general point that in a democracy we the people get what we deserve and are ultimately responsible, I completely agree. But we don't always reward low taxes and high spending. After increasing taxes, Obama was re-elected on the promise of yet more tax hikes. Trump lost in 2020 even though he had cut taxes. Biden lost after a massive spending blowout. There are other factors at work of course, especially in the last two elections, but even on taxes and spending our preferences don't seem to be set in stone.
Still, we both agree that at the current juncture, a serious discussion on deficits is sorely needed.
I don’t think you are correct about fiscal outcomes for Carter and Obama (we agree on Clinton).
My point was that under those three presidencies, the US experienced multi-year deficit reduction as a percentage of GDP.
According to the annual data published by the FRB St Louis & OMB, the US federal deficit was (on an annual basis) from 1976 (first year) to 1980 (last year) as follows: -3.9%, -2.6%, -2.5%, -1.6%, -2.6%. So for the first three consecutive years under Carter the deficit fell as a percentage of GDP. Under Obama, the figures are as follows from 2008 to 2016: -3.1%, -9.8%, -8.6%, -8.3%, -6-6%, -4.0%, -2.8%, -2.4%, -3.1%, a clear downward trajectory. Finally, for completeness, in Trump ‘1’, the corresponding figures from 2016-2020 are: -3.1%, -3.4%, -3.8%, -4.6%, -14.6% (Covid).
So I think one can correctly say that the three D presidents presided over consecutive years of falling budget deficits during their time in office.
It is therefore also slightly disingenuous to say the average deficits during their presidencies were higher than for their predecessors, insofar as in each case they inherited large deficits upon entering office, which then fell during (most of) their tenure.
That said, my point was not to make a partisan point (though I think a bit of myth-busting is no bad thing), but rather to observe that there has been little political reward for US fiscal consolidation over the past 50 years. And perhaps the most glaring example of that was Bush I, whose tax hikes helped him lose in 1992 (albeit, it did not help his cause that he broke his public pledge never to do so).
I conclude with my previous observation, namely that meaningful resolution of large (structural) deficits in the US will not be possible until voters change the political incentives for elected officials.
Larry, your numbers are the same as mine, so my point stands, but I like your sense of humor.
If anything is disingenuous, I'm afraid, it is your way of looking at the numbers. For Obama, are you claiming "a clear downward trajectory" from 3.1% to 3.1%?
Or, since Obama took office in 2009, a clear downward trajectory from 9.8% to 3.1%?
Let's say you've been running on average a 7-minute mile. Then I come in. On my first day, I 'run' a 1-hour mile. Then I gradually bring my time down to a 15-minute mile. Should my performance be praised as an improvement over yours?
Wow! So, Obama inherits the Great Recession (GFC), which arithmetically blows up the budget deficit in year one. He deploys fiscal easing to stabilize the economy and the financial system. And then presides over 7 years of declining deficits as a share of GDP and all we are supposed to remember is that the end point in 2016 was the pre-GFC starting point a decade earlier?
Put differently, if Obama had presided over an even more rapid fiscal consolidation post GFC, then one imagines that Summers’ ‘secular stagnation’ would have been a Herbert Hoover style slump. Can we not judge fiscal adjustment in a fashion that accounts for an economically and socially sensible trajectory towards fiscal stability and not by a benchmark that implies a reckless consolidate at all costs approach?
Oh boy. Larry, I had left out Obama's first term exactly because the immediate aftermath of the GFC was an outlier. Any president would have reduced the deficit from that exceptional high mark.
I have a much worse opinion of the Trump administration than you have. It seems we agree that the US fiscal program - in the broad sense used in economics - is unsustainable. I am not sure however that we may all agree on this, now that the ‘bad guy’ (Trump) as opposed to the ‘good guy’ (Biden) is in power, as you seem to imply: it seems to me that Americans as so polarised that they can’t agree even on much easier to grasp economic facts (see eg the wild differences in inflation as estimated by Democrats and Republicans).
I would also like to qualify the impression you give that, possibly for the same ‘political’ reasons, public debt is now seen as a problem whereas until yesterday was seen as the solution:
- as you probably know well, and just to give examples from international institutions the economists writing the Fund’s Fiscal Monitor or the Commission’s Public Finances in Europe Report, have elaborated at length on the dangers of public debt. Political statements things may be a bit different: I understand that not everyone in the Commission is so happy with Germany throwing into the garbage their fiscal rules, not least because of the fallout on the recently reformed EU fiscal. But the dissatisfaction cannot be voiced openly, because the extra deficit spending for German rearmament is the only thing the Commission can show for the hastily conceived ‘national escape clause’ for defence;
- the big change compared to yesterday is that one may not be able to count on the interest rate on debt to be below the rate of growth of the economy and therefore to take care of debt sustainability. Until interest payments stayed constant or even decreased as share of GDP while the debt ratio kept rising it was objectively difficult for fiscal hawks to sound the alarm. The erratic behaviour of the Trump presidency is not helping in the job of selling Treasuries, I would say.
I am afraid dear Marco that we have entered into a (at first hidden and then unveiled with Covid) phase of growing state intrusion in the economy. This has little to do with presidents, needs, unsustainable deficits, constitutional bans, etc… rather it reflects a general move by politicians, who having become so bad and inept try to force them back in the game with disastrous results. This costs the citizens more and blurs signals for businesses, and so a catastrophe is near. Look at Trump who promised deregulation; look at Europe whose leaders (undeterred by their disastrous performance in policing) seem so surprised when voters chose anti-European candidates that their first instinct - in France, Romania, Poland, Portugal - is to create a ‘common front’ against the anti-European. Politician in the West have woken up. I suspect they look with envy to the power largesse that certain leaders have - Modi, Xi. So they want to copy them. Unfortunately, in terms of politics and strategy they wouldn’t know where to start and they are definitely not Xi.
This, Luca, is probably the biggest issue. And you are right, it goes well beyond the problem of fiscal deficits and debt. It's been spurred and justified with a succession of crises, both real and imagined, and existential threats, environmental, economic and social. Turning the tide seems quite an arduous task, so your prognostication of catastrophe rings true. Because unfortunately, the quality of our politicians has declined as fast as their intrusive presence has grown.
Thanks. I agree that polarization makes any sensible discussion on economic issue very hard these days.
However, it still the case that voiced concern about US fiscal policy has increased substantially after Trump's election, including from the vast majority of the general and financial media.
I also disagree on the role played by international financial institutions. For example, as recently as 2020 the IMF urged governments to borrow even more, taking advantage of low interest rates, even though debt levels had already risen substantially. And yes, the recommendation was to borrow and invest in growth-enhancing ways, but we all know very well how governments will spend money when encouraged to borrow because money is essentially free. ( https://meetings.imf.org/en/IMF/Home/Blogs/Articles/2020/10/05/blog-public-investment-for-the-recovery? )
The IMF should instead have warned that interest rates would not remain low forever, and large debt stocks would become a problem when rates rose -- as they inevitably did. I am well aware that honest economists toiling on technical reports do raise the right issues -- that was me in an earlier incarnation -- but it's the loud public messages of these institutions that ultimately matter. And they made things worse.
Your observation on the European Commission not voicing openly any concern on Germany's new debt plans, it seems to me, only strengthens my point.
I think we mostly agree. I would stress however that rising long- term real interest rates are a genuine game changer.
On the Denocrat/Republican divide on fiscal policy it is worth noting that the pattern during the Great Moderation could be seen as following the Persson and Svenson model on the strategic use of public debt: a right-wing party favouring small(er) facing the possibility of electoral defeat would accumulate public debt to tie the hands its left-wing successor. In this perspective it is not coincidental that deficit reductions were delivered by Democratic administrations. The Biden administration (good guy was put in inverted quotes), can be seen, here as elsewhere, as refusing to play the same game: the two sides are now apparently locked in a game of ‘fiscal chicken’. I suspect that the protectionist policies of the Trump administration increase the likelihood that they move to pay the price for irresponsible fiscal behaviour.
I completely agree that the US way of discussing fiscal policy is moronic. The best one could say is that to use the change in the deficit relative to a current policies/laws baseline is a clever way to delude oneself about the fiscal outlook. In this case, the statement that the Big Beautiful Bill (BBB, perhaps the administration’s rating target?) adds $3 trillion “new red ink” over 10 years hides the fact that the bill is also projected to add $24 trillion “old red ink” over the next 10 years. Bessent says he thinks 3 percent GDP deficit would be a reasonable target for the US. Sounds fine to me, but if we use 3 percent of GDP as the baseline, the BBB adds $17 trillion to the debt over the next 10 years (assuming that the 10-year yield is 4 percent during that period). Up to this year, the fiscal madness was bipartisan. But now it’s the Republicans trying to single-handedly bankrupt the country, while Trump and his family are openly lining their pockets.
Albert, I agree with you except on the statement that fiscal madness is no longer bi-partisan. As I noted in a couple of posts before the election, both candidates had very suboptimal economic policies platforms. It is a delusion to think that a Harris presidency would have delivered greater sanity.
Marco, looking at US fiscal history over the last 45 years, I think, shows that Democrats are in practice much more responsible on fiscal policy than Republicans. That said, I would put some blame for the fiscal insanity on the “guys” (including Blanchard and Summers) who around 2018-19 came up with the “brilliant insight”that if growth is higher than the average interest rate on debt, there can’t be a fiscal crisis problem. As we have seen during the euro debt crisis, interest rates can jump ahead of the growth rate out of nowhere. Now, the US has a good chance to find out how uncomfortable things can get when that happens.
Thanks Albert. As you've seen, Larry and I have got sucked into a discussion on D vs. R. I'm in the minority, so I will take a step back on this. But you are bringing us back to the more important point, namely that in the last several years the degree of fiscal irresponsibility has escalated in a way that is bound to have unpleasant consequences.
Agree with you. Tariffs, for the present uncertain but eventually to a reasonable level, are here to stay. That will significantly impact future fiscal position.
Very nice piece, Marco.
The other angle to consider is the politics of deficit reduction. If one looks at US budget deficits as a share of GDP from the 1970s to 2017, there are three instances of multi-year reductions—under Carter, Clinton and Obama.
Now that might be circumstantial rather than causal, and fiscal legislation is passed by Congress, which in many of those presidencies was divided or controlled by the GoP. Even so, matters did look different when the GoP sat in the White House, so one must wonder.
But the more important point is this: In each of those multi-year periods of deficit reduction incumbents (or their successors) reaped little, if any, political reward for their achievements. Indeed, successive Administrations (Reagan, Bush II, Trump I) happily and mostly politically successfully presided over expanding deficits (as a share of GDP) that one might argue were ‘politically financed’ by the previous administrations’ politically un-appreciated fiscal rectitude.
So while it is correct to be dismayed about how the fiscal sausage is made in Washington, DC, perhaps we must also acknowledge that we, the American people, are ultimately responsible. If election outcomes reward the politics of low taxes and high spending, then maybe we shouldn’t be all that surprised to see little progress on deficit reduction?
Which underscores your opening point, namely that we need a serious discussion about deficits.
Thanks Larry.
On your point on multi-year deficit reduction, I don't think it's circumstantial, it is incorrect.
You are right on Clinton, but not on Carter and Obama. For Obama, to be fair to him we need to ignore his first term, when in response to the GFC he ran an average deficit of 8.4% of GDP, much larger than even today. But even in his second term the deficit average 4.0% of GDP, more than twice as large as under the preceding W Bush tenure.
Under Carter the deficit averaged 2.4% of GDP. Very reasonable, but 50% larger than under the Nixon/Ford tenure (1.6% of GDP).
And that is why, so far, Republicans have had a much stronger reputation on fiscal responsibility.
During the first three years of Trump I, before Covid hit, the deficit averaged 4.0% of GDP, exactly the same as under Obama's second term; so I think Trump benefited from the impact of his pro-growth reforms rather than of larger deficits.
Now, on your general point that in a democracy we the people get what we deserve and are ultimately responsible, I completely agree. But we don't always reward low taxes and high spending. After increasing taxes, Obama was re-elected on the promise of yet more tax hikes. Trump lost in 2020 even though he had cut taxes. Biden lost after a massive spending blowout. There are other factors at work of course, especially in the last two elections, but even on taxes and spending our preferences don't seem to be set in stone.
Still, we both agree that at the current juncture, a serious discussion on deficits is sorely needed.
Hi Marco,
I don’t think you are correct about fiscal outcomes for Carter and Obama (we agree on Clinton).
My point was that under those three presidencies, the US experienced multi-year deficit reduction as a percentage of GDP.
According to the annual data published by the FRB St Louis & OMB, the US federal deficit was (on an annual basis) from 1976 (first year) to 1980 (last year) as follows: -3.9%, -2.6%, -2.5%, -1.6%, -2.6%. So for the first three consecutive years under Carter the deficit fell as a percentage of GDP. Under Obama, the figures are as follows from 2008 to 2016: -3.1%, -9.8%, -8.6%, -8.3%, -6-6%, -4.0%, -2.8%, -2.4%, -3.1%, a clear downward trajectory. Finally, for completeness, in Trump ‘1’, the corresponding figures from 2016-2020 are: -3.1%, -3.4%, -3.8%, -4.6%, -14.6% (Covid).
So I think one can correctly say that the three D presidents presided over consecutive years of falling budget deficits during their time in office.
It is therefore also slightly disingenuous to say the average deficits during their presidencies were higher than for their predecessors, insofar as in each case they inherited large deficits upon entering office, which then fell during (most of) their tenure.
That said, my point was not to make a partisan point (though I think a bit of myth-busting is no bad thing), but rather to observe that there has been little political reward for US fiscal consolidation over the past 50 years. And perhaps the most glaring example of that was Bush I, whose tax hikes helped him lose in 1992 (albeit, it did not help his cause that he broke his public pledge never to do so).
I conclude with my previous observation, namely that meaningful resolution of large (structural) deficits in the US will not be possible until voters change the political incentives for elected officials.
Larry, your numbers are the same as mine, so my point stands, but I like your sense of humor.
If anything is disingenuous, I'm afraid, it is your way of looking at the numbers. For Obama, are you claiming "a clear downward trajectory" from 3.1% to 3.1%?
Or, since Obama took office in 2009, a clear downward trajectory from 9.8% to 3.1%?
Let's say you've been running on average a 7-minute mile. Then I come in. On my first day, I 'run' a 1-hour mile. Then I gradually bring my time down to a 15-minute mile. Should my performance be praised as an improvement over yours?
Wow! So, Obama inherits the Great Recession (GFC), which arithmetically blows up the budget deficit in year one. He deploys fiscal easing to stabilize the economy and the financial system. And then presides over 7 years of declining deficits as a share of GDP and all we are supposed to remember is that the end point in 2016 was the pre-GFC starting point a decade earlier?
Put differently, if Obama had presided over an even more rapid fiscal consolidation post GFC, then one imagines that Summers’ ‘secular stagnation’ would have been a Herbert Hoover style slump. Can we not judge fiscal adjustment in a fashion that accounts for an economically and socially sensible trajectory towards fiscal stability and not by a benchmark that implies a reckless consolidate at all costs approach?
Oh boy. Larry, I had left out Obama's first term exactly because the immediate aftermath of the GFC was an outlier. Any president would have reduced the deficit from that exceptional high mark.
I have a much worse opinion of the Trump administration than you have. It seems we agree that the US fiscal program - in the broad sense used in economics - is unsustainable. I am not sure however that we may all agree on this, now that the ‘bad guy’ (Trump) as opposed to the ‘good guy’ (Biden) is in power, as you seem to imply: it seems to me that Americans as so polarised that they can’t agree even on much easier to grasp economic facts (see eg the wild differences in inflation as estimated by Democrats and Republicans).
I would also like to qualify the impression you give that, possibly for the same ‘political’ reasons, public debt is now seen as a problem whereas until yesterday was seen as the solution:
- as you probably know well, and just to give examples from international institutions the economists writing the Fund’s Fiscal Monitor or the Commission’s Public Finances in Europe Report, have elaborated at length on the dangers of public debt. Political statements things may be a bit different: I understand that not everyone in the Commission is so happy with Germany throwing into the garbage their fiscal rules, not least because of the fallout on the recently reformed EU fiscal. But the dissatisfaction cannot be voiced openly, because the extra deficit spending for German rearmament is the only thing the Commission can show for the hastily conceived ‘national escape clause’ for defence;
- the big change compared to yesterday is that one may not be able to count on the interest rate on debt to be below the rate of growth of the economy and therefore to take care of debt sustainability. Until interest payments stayed constant or even decreased as share of GDP while the debt ratio kept rising it was objectively difficult for fiscal hawks to sound the alarm. The erratic behaviour of the Trump presidency is not helping in the job of selling Treasuries, I would say.
I am afraid dear Marco that we have entered into a (at first hidden and then unveiled with Covid) phase of growing state intrusion in the economy. This has little to do with presidents, needs, unsustainable deficits, constitutional bans, etc… rather it reflects a general move by politicians, who having become so bad and inept try to force them back in the game with disastrous results. This costs the citizens more and blurs signals for businesses, and so a catastrophe is near. Look at Trump who promised deregulation; look at Europe whose leaders (undeterred by their disastrous performance in policing) seem so surprised when voters chose anti-European candidates that their first instinct - in France, Romania, Poland, Portugal - is to create a ‘common front’ against the anti-European. Politician in the West have woken up. I suspect they look with envy to the power largesse that certain leaders have - Modi, Xi. So they want to copy them. Unfortunately, in terms of politics and strategy they wouldn’t know where to start and they are definitely not Xi.
This, Luca, is probably the biggest issue. And you are right, it goes well beyond the problem of fiscal deficits and debt. It's been spurred and justified with a succession of crises, both real and imagined, and existential threats, environmental, economic and social. Turning the tide seems quite an arduous task, so your prognostication of catastrophe rings true. Because unfortunately, the quality of our politicians has declined as fast as their intrusive presence has grown.
Thanks. I agree that polarization makes any sensible discussion on economic issue very hard these days.
However, it still the case that voiced concern about US fiscal policy has increased substantially after Trump's election, including from the vast majority of the general and financial media.
I also disagree on the role played by international financial institutions. For example, as recently as 2020 the IMF urged governments to borrow even more, taking advantage of low interest rates, even though debt levels had already risen substantially. And yes, the recommendation was to borrow and invest in growth-enhancing ways, but we all know very well how governments will spend money when encouraged to borrow because money is essentially free. ( https://meetings.imf.org/en/IMF/Home/Blogs/Articles/2020/10/05/blog-public-investment-for-the-recovery? )
The IMF should instead have warned that interest rates would not remain low forever, and large debt stocks would become a problem when rates rose -- as they inevitably did. I am well aware that honest economists toiling on technical reports do raise the right issues -- that was me in an earlier incarnation -- but it's the loud public messages of these institutions that ultimately matter. And they made things worse.
Your observation on the European Commission not voicing openly any concern on Germany's new debt plans, it seems to me, only strengthens my point.
I think we mostly agree. I would stress however that rising long- term real interest rates are a genuine game changer.
On the Denocrat/Republican divide on fiscal policy it is worth noting that the pattern during the Great Moderation could be seen as following the Persson and Svenson model on the strategic use of public debt: a right-wing party favouring small(er) facing the possibility of electoral defeat would accumulate public debt to tie the hands its left-wing successor. In this perspective it is not coincidental that deficit reductions were delivered by Democratic administrations. The Biden administration (good guy was put in inverted quotes), can be seen, here as elsewhere, as refusing to play the same game: the two sides are now apparently locked in a game of ‘fiscal chicken’. I suspect that the protectionist policies of the Trump administration increase the likelihood that they move to pay the price for irresponsible fiscal behaviour.
Calling good guy Biden is quite the stretch, especially as regards to Economic policy
I completely agree that the US way of discussing fiscal policy is moronic. The best one could say is that to use the change in the deficit relative to a current policies/laws baseline is a clever way to delude oneself about the fiscal outlook. In this case, the statement that the Big Beautiful Bill (BBB, perhaps the administration’s rating target?) adds $3 trillion “new red ink” over 10 years hides the fact that the bill is also projected to add $24 trillion “old red ink” over the next 10 years. Bessent says he thinks 3 percent GDP deficit would be a reasonable target for the US. Sounds fine to me, but if we use 3 percent of GDP as the baseline, the BBB adds $17 trillion to the debt over the next 10 years (assuming that the 10-year yield is 4 percent during that period). Up to this year, the fiscal madness was bipartisan. But now it’s the Republicans trying to single-handedly bankrupt the country, while Trump and his family are openly lining their pockets.
Albert, I agree with you except on the statement that fiscal madness is no longer bi-partisan. As I noted in a couple of posts before the election, both candidates had very suboptimal economic policies platforms. It is a delusion to think that a Harris presidency would have delivered greater sanity.
https://justthink.substack.com/p/the-debates-big-loser-the-us-economy
https://justthink.substack.com/p/the-four-horsemen-of-the-election
Marco, looking at US fiscal history over the last 45 years, I think, shows that Democrats are in practice much more responsible on fiscal policy than Republicans. That said, I would put some blame for the fiscal insanity on the “guys” (including Blanchard and Summers) who around 2018-19 came up with the “brilliant insight”that if growth is higher than the average interest rate on debt, there can’t be a fiscal crisis problem. As we have seen during the euro debt crisis, interest rates can jump ahead of the growth rate out of nowhere. Now, the US has a good chance to find out how uncomfortable things can get when that happens.
Thanks Albert. As you've seen, Larry and I have got sucked into a discussion on D vs. R. I'm in the minority, so I will take a step back on this. But you are bringing us back to the more important point, namely that in the last several years the degree of fiscal irresponsibility has escalated in a way that is bound to have unpleasant consequences.
Agree with you. Tariffs, for the present uncertain but eventually to a reasonable level, are here to stay. That will significantly impact future fiscal position.