America, we need to talk about your spending habit

What is missing in this campaign, as I have written before and no doubt will write again, is an informative and honest discussion of the role of government in American life. We don’t want to admit that government worth having is worth paying for, through taxes — with the well-known exceptions of recessions and wars, when deficits are often inevitable and desirable.

Let’s concede that higher deficits are one problem that can’t be blamed on Donald Trump. Since the 1970s and 1980s, Democrats and Republicans alike have evaded the hard questions required to balance the budget.

Should we direct more — or less — aid to those in the bottom half of the income distribution? Have we shortchanged defense? With an elderly population that is richer and healthier than its predecessors, should we raise eligibility ages for Social Security and Medicare? Should government continue to run a railroad (Amtrak)? Are we undertaxed? Do farmers need to be so heavily subsidized?

We have deferred these and other difficult decisions. Instead of cutting spending or raising taxes, successive presidents and Congresses have covered the gaps by borrowing. Since 1961, federal deficits have occurred in all but five years (1969 and 19982001). Even these materialized only at the end of the long economic booms of the 1960s and late 1990s.

By the end of 2018, the federal debt held by the public — the total of all past annual deficits — was near $16 trillion, equal to 78% of the economy (gross domestic product, or GDP). On present trends, the Congressional Budget Office projects that the debt reaches $29 trillion in 2029, about 95% of GDP.

Though Trump didn’t create the deficits, he has played the game with zest, embracing massive tax cuts and sizable spending increases. Politically, the appeal is obvious: something for nothing. Politicians can dispense new spending or tax cuts without paying for them through offsetting tax increases or spending cuts.

Meanwhile, government’s activities have mushroomed, financed mainly by declines in defense spending. In 1960, military outlays represented 52% of the total federal spending. Now, they’re 15%. In their place are health care programs (Medicare, Medicaid and Obamacare), expanded Social Security, the FBI, the Environmental Protection

Agency, and more.

Americans have gotten used to Big Government, while paying only for smaller government. One reason that this has, so far, worked is that the dollar is the world’s major currency for international trade, investment and personal saving. People take refuge in it. Lending and borrowing in dollars create a global demand for the currency. It’s easy for our government to borrow at low interest rates.

Democratic presidential candidates have tried to burnish their financial credentials by arguing that new spending can be financed by taxing the wealthy. But this is likely to disappoint.

This is just the latest chapter in our tendency to disguise the costs of government. The resulting complacency is inevitable. It poses two dangers.

First: As government debt piles up, it increasingly crowds out private investment. This, in turn, weakens productivity growth, which is a major source of higher living standards. With interest rates now so low, this doesn’t seem a problem — which is why it is.

Second: The truly scary possibility is a run on the dollar. If huge budget deficits subvert global confidence in the dollar — causing investors to dump the currency — restoring that confidence might require deep cuts in federal spending and steep increases in taxes.

For these reasons, we ought to tackle the budget deficits sooner rather than later. The odds of this happening seem negligible. We deplore deficits but find them more acceptable than the alternative. No one really knows how much debt is too much. Our policy seems to be to wait until we discover the answer. But by then, it may be too late.