The Magazine

The Real Cliff

The staggering debt from decades of continuous government borrowing is about to come due

Dec 24, 2012, Vol. 18, No. 15 • By CHRISTOPHER DEMUTH
Widget tooltip
Audio version Single Page Print Larger Text Smaller Text Alerts

What was not foreseen was the effect of the Keynesian proposition in the context of practical politics. For it taught that government officials, in weighing current revenues and expenditures, should weigh the needs of the known present against the resources of an imagined future. But the present is always cluttered with problems and difficulties, while the future is an abstraction. The future is also, in the progressive American mind, a more prosperous and untroubled place​—​especially if we can just get ourselves through today’s pressing exigencies. This manner of thinking tended to dissolve the distinction between investing for the future and borrowing from the future.

Even more insidiously, Keynesian borrowing raised the prospect of providing the electorate as a whole with higher current benefits than taxes to fund those benefits. Whatever the future may hold, it will certainly be populated by many people who are not voters today​—​the younger generation and the yet unborn. Today’s debts will be repaid by some or all of them, in one way or another​—​through higher taxes or lower benefits to accommodate payments on the loans, or through loan defaults, or through the partial default of inflation. When clever economists assure politicians that more government debt is unworrisome because “we owe it to ourselves,” they are using the soothing collective “we” to gloss over all the contentious tasks of allocating burdens and benefits among competing interests and constituencies that are the stuff of practical politics. (“What do you mean ‘we,’ Kemosabe?”) At any point in time, politicians will be happy to relax the resource constraints on their own choices and leave greater constraints for their successors to deal with.

These political dynamics quickly left formal Keynesianism in the dust. In the 52 years since 1960, the federal budget has been in balance or surplus only five times (although the deficits before 1975 were mostly small); the cumulative deficits have far exceeded the surpluses, and there has been no correlation of fiscal balances to economic cycles. Each new year has brought its own unique and compelling reasons for borrowing just a little bit more for a little while longer​—​with the effect of shifting consumption further ahead of production from every new baseline. Even the economic expansions of the mid-1960s and mid-1980s were treated not as opportunities for budget surpluses but instead as evidence that deficit stimulus was working. The exceptional surplus years of 1998-2001 may be chalked up to the steely discipline of President Clinton or Republican Congresses (or to the virtues of divided government and the dot-com bubble), but it should be noted that they began as a surprise​—​Clinton’s 1998 budget proposed a deficit and projected deficits through 2002.


Now there is more to the story, and a twist in the plot. Following the stagflation of the 1970s, liberal Keynesianism was joined by conservative, anti-Keynesian “supply-side economics” as a new force for debt expansion. Supply-side theory rejected aggregate demand management and emphasized microeconomic incentives, especially the tendency of high marginal tax rates to suppress economic growth and, to a degree, government revenues. Once again, an important intellectual advance acquired a life of its own. In the journals and newspaper op-eds, tax cutting was advocated to promote economic production, but in the hands of politicians it acquired additional purposes​—​including, eventually, promoting debt-financed consumption.

Ronald Reagan and Jack Kemp were authentic supply-siders, but they and other Republicans understood that tax cutting could serve an electoral purpose as well: In response to the big-spending Democrats, the GOP could turn the tables and offer lower taxes rather than purse-lipped fiscal restraint. Then, a few years into Reagan’s first term, another purpose appeared. The administration had been much more successful in cutting taxes than cutting spending; while the economy was recovering smartly, deficits and debt were growing steeply. What were limited-government conservatives to do?

I was working at the White House and OMB in those years, and was party to many a late-night argument over two divergent strategies. “Starve the Beast” held that the public would tolerate only so much deficit spending​—​so cutting taxes would at some point restrain spending as well. “Serve the Check” held that the only way to limit spending was to charge its full price at retail: Set taxes at an average of 20 percent of individual incomes and we would discover whether the public really wanted federal spending of 20 percent of national income.

Recent Blog Posts