The U.S. government is drowning in a sea of red ink. Federal deficits in 2020 and 2021 were by far the highest on record, totaling roughly $6 trillion between them.
The Congressional Budget Office projects uncontrolled deficits as far as the eye can see, even assuming the current spending binge ends soon. Americans are starting to feel the pain of an economy awash in federal deficit spending, including the highest inflation in over 30 years.
How did America get to this point, and what can be done to fix the situation?
The picture isn’t pretty, but we can’t fix the problem unless we’re willing to see it.
Exactly what created the fiscal mess depends on how one frames the question. If we’re referring to the enormous deficit in fiscal year 2021, the answer is unsurprising: mostly the vast new spending initiatives enacted during the COVID-19 pandemic.
From 1973 to 2020, federal spending averaged 20.7% of GDP, while tax collections averaged 17.3%, for an average deficit of 3.4% of GDP. In 2021, the deficit soared to 13.4%, almost entirely because spending increased to 30.6% of GDP.
Roughly two-thirds of the shortfall was created by legislation enacted either in the first year of the Biden administration or near the end of the Trump administration, including increased income security spending to shield Americans from the economic fallout of the pandemic. However, much of the spending was unrelated to the pandemic, and some lawmakers are attempting to extend it years into the future.
While today’s record deficits might be partially excused by pandemic conditions, the federal fiscal situation grows worse year after year, Congress after Congress, and administration after administration, whether there is a pandemic or not. The Biden administration is on pace to shatter all previous deficit spending records — just as the Trump administration presided over larger deficits than the Obama administration, which presided over larger deficits than any predecessor.
Why is this happening, and why isn’t it being fixed? The answer, as my study shows, involves unpleasant truths that both voters and politicians would prefer to avoid.
Let’s first dispense with some common myths and distractions. Runaway deficits are not caused by annually appropriated “discretionary” spending. After averaging 8.1% of GDP for a half-century, total discretionary appropriations were only 7.4% of GDP in 2021. CBO projects only 5.5% by 2040. Defense appropriations in particular have declined from a historical average of 4.3% of GDP to 3.3% this year.
Nor does the problem have much to do with tax cuts for “the rich” or anyone else. In July, CBO estimated federal tax collections for 2021 of 17.2% of GDP, nearly the historical average of 17.3%. Due to the way federal income tax brackets are indexed, CBO projects future tax collections to exceed historical norms as a share of the economy.
Federal finances are unsustainable in spite of tax law, not because of it. Politicians say billionaires aren’t paying their fair share primarily because it’s easy politics, not because it has much to do with the budget problem.
Incredibly, nearly 60% of the long-term fiscal imbalance was created in just eight years of legislating, from 1965 to 1972, spanning the Lyndon Johnson and Richard Nixon administrations. The resultant fiscal problem is driven almost entirely by spending growth in three budgetary areas: 47% from Medicare, 22% from Medicaid and the Affordable Care Act and 15% from Social Security.
Medicare spending has grown faster than sustainable essentially since its inception in 1965 and expansion in 1972. Lawmakers still haven’t figured out how to moderate its growth to manageable rates, or even how to maintain solvency in its Hospital Insurance program beyond 2026. Lawmakers’ promises to further expand future Medicare coverage before fixing current Medicare are deeply irresponsible.
Social Security’s costs would be manageable if its benefits still followed Franklin Roosevelt’s original design. But in 1972, lawmakers expanded it and created automatic benefit growth, far exceeding what workers contribute to the program. Lawmakers still haven’t decided how to fund these increases, even after partial corrections in 1977 and 1983. As with Medicare, it’s irresponsible for lawmakers to promise to expand future Social Security when they haven’t dealt with its current cost growth.
Medicaid and the ACA may be where lawmakers have been the most irresponsible. They have repeatedly expanded Medicaid and are attempting to do so again in the Build Back Better Act, even though Medicaid was already growing unsustainably before its expansion in the ACA.
Promises to pay for new spending with additional taxes are both misleading (because of various budget gimmicks) and beside the point. Proposed new taxes aren’t nearly enough to pay for the runaway spending embedded in current law, let alone additional spending piled on top. Politicians’ favorite game, promising to make voters’ lives better with more federal spending, cannot be played indefinitely.
No lawmaker scores political points by acknowledging these facts, but the data show definitively that they are the facts. While we don’t need to dramatically cut Medicare, Medicaid, ACA or Social Security spending relative to their current levels, the federal fiscal situation cannot be stabilized until their growth is moderated. The longer elected officials duck reality the more certain it is that Americans will ultimately pay for this neglect through faltering economic prospects and damaging price inflation.
Charles Blahous is a senior research strategist at the Mercatus Center at George Mason University. His new study is “Why We Have Federal Deficits: An Updated Analysis.” He wrote this column for The Dallas Morning News.
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