July 17, 2017

Deficits and the 'Forgotten Man'

Bruce Yandle

Distinguished Adjunct Fellow

According to the Congressional Budget Office, the federal government will run a $693 billion deficit this year, an upward revision from $534 billion in March. Acting as if we have a gold-plated government credit card, we Americans buy more government services than we pay for. As my 2nd grade teacher might have put it, this shows a lack of self-control.

It's worse than that. We even criticize elected officials who, in a moment of self-control frenzy, dare to challenge anyone who would cut spending on a favorite program.

We see statements like: "How can we possibly reduce spending on Medicaid or require students to pay off their government loans? After all, these activities serve a good purpose. Many people depend on them. And the increased spending creates jobs!" And it's true these programs are beneficial; many do rely on them; and they do generate jobs.

Of course, we are not talking about an occasional blast of red ink. Based on projected spending and revenue estimates, the U.S. government will run an annual deficit each year for the next 30 years. By 2027, just 10 years from now, the projected deficit will equal 91 percent of GDP, up from 31.7 percent in 1981. This year it will be 77 percent, the highest since World War II.

It's been quite a ride.

But these days we aren't borrowing to win a war or save the world. We are borrowing to support activities we once paid for the old fashioned way, with our own earnings. There was a time when families paid the corner grocer, the landlord, their doctor bills and college loans with their own money. It wasn't always easy, and some declared bankruptcy.

Shifting some of these activities to the government and calling them entitlements has made it possible for all of us to consume more and pay less, or not at all. Is there some distant Santa Claus or another rich benefactor who someday will pay off our government credit card balance? Or will we go bust with one huge bang?

Unfortunately, help is not on the way. As a society, we will have to dig ourselves out of this problem much like those struggling families of years past had to do.

In a recent study of federal government fiscal policy, Jody Lipford, a Presbyterian College economist, and I inspected data for the years 1979 to 2013, dividing U.S. taxpayers into five income groups. We found that among all five quintiles — those earning a lot, very little or somewhere in between — the percentage of taxes paid as a share of market income fell. Generally the less you made, the more your tax burden fell over that time period.

With the exception of the surplus years of 1999 and 2000, the federal government was able to cut taxes but was unable to generate enough income to pay the bills. As a nation, we just kept on borrowing to cover our government-provided consumption benefits.

Lipford and I then asked the hard question: Who will bail us out?

Our answer? The Forgotten Man and Forgotten Woman, whom I've previously written about in this column.

In this case, the Forgotten Men and Women are those unborn, future hard-working individuals who will pay more taxes and enjoy fewer government benefits while paying down the debt they inherit from our generation. William Graham Sumner, the Yale professor and originator of the metaphor, in 1876 described the Forgotten Man this way:

He works, he votes, generally he prays — but he always pays — yes, above all, he pays. He does not want an office; his name never gets into the newspaper except when he gets married or dies. He keeps production going on. He contributes to the strength of parties. He is flattered before election. He is strongly patriotic. He is wanted, whenever, in his little circle, there is work to be done or counsel to be given. He may grumble some occasionally to his wife and family, but he does not frequent the grocery or talk politics at the tavern. Consequently, he is forgotten.

So why doesn't the Washington deficit machine stop? Because those unborn taxpayers have no voice in the matter, and the rest of us and our public servants are enjoying the ride without having to pay for it. After all, why should Medicaid be cut? Or housing subsidies? Or school lunch programs? Or flood plain insurance? And why not build more highways, bridges, and treatment plants? These are good things, and they produce jobs.

But when will it end? There are too many moving parts to the story for anyone to know. We can, though, still point to a time when continued consumption on credit will become extraordinarily difficult: When the interest cost of the debt becomes so large that, after paying the interest bill, Social Security, and funding healthcare, nothing will be left to pay for the rest of government.

According to the Congressional Budget Office, that will be the picture in 2047. We have about 25 or 30 more years to go. Enjoy the ride.