Rising Federal Deficits Hamper U.S. Economic Health and Future

Last August, I asked that you consider your vote carefully as your vote would determine the direction of the national, state, and regional economic policymaking. The vote in November 2018 was a great start but your vote is no less crucial next year.

To truly appreciate the economic peril that may come ahead of the 2020 vote leads you to look no further than the tremendous federal deficits since 2017. Start with the often criticized Obama administration’s handling of the post Great Recession growth years. Economic growth was allegedly too slow and not as far reaching. Much of that had to do with the direction that the Obama administration wanted to go and the restraints placed by Congress. Look at the numbers: According to Federal Reserve data, from 2008 to 2012, the famed “trillion dollar deficits” were the result of a government accepting the challenge to revive an economy that fell into a deep coma. In the absence of private sector leadership, there must always be government leaders ready to lead and act. I believe they did.

However, from 2012-2016, government spending was drastically cut, peaking in 2015 at about $440 billion and then rising to just under $600 billion in 2016--a presidential election year with an outgoing President. Strangely though as there was plenty of evidence that the economy was in healthy shape, since 2016, the deficits have just kept rising. The past is brought back up because these numbers may provide an explanation as to why the Tax Cuts and Jobs Act of 2017 was pushed to pass and how ill-timed it was. The repercussions of that 2017 tax cut are now manifesting.

Congress post 2010 turned strongly in the direction of fiscal conservatism. When trying to recover from a very deep and terrible recession, being fiscally conservative is not at all the right policy call. From 2012-2013 alone, government spending was cut by 37%! Many of you reading this will remember that time period. There was not a whole of cheering for the economy. Even though the end of the Great Recession was technically the second quarter of 2009, many Americans still struggled in 2012 and 2013. So then why cut spending so drastically?!!

As the Federal Reserve was stuck with no greater monetary policy to offer, fiscal policy or collective policy action by Congress and the President more than likely precipitated the slow but steady positive growth rates because spending was cut too much, too fast instead of more sensible checks on spending. In other words, the level of government spending was violently shook to a stop. In 2012, the federal deficit was about 6.6% of gross domestic product, or if you will the national income. By 2015, it had sunk to 2.4% of GDP before rising for an election bump to 3.1% of GDP in 2016.

If congressional leaders were already convinced that the economy was on solid footing, presumably that was why there was loud advocation for cutting government spending, then why did we allow from 2016-2018 a 33% rise in the federal deficit and the Tax Cut Bill of 2017? That kind of fiscal policy makes no economic or logical sense. As a business, when sales are up, you don’t spend uncontrollably. Modest increases in spending balance out with padding the “rainy day fund”. Then, when sales drop, you would have the ability to spend in order to survive and compete, until sales return up.

GDP grew at 2.6% for all of 2018. Did the Tax Cut bill of 2017 contribute to that? Well, GDP of 2017 was 2.3%, so maybe we can say a little bit. However, the greater problem and question is what will 2020 bring? 2019 will end up looking like 2017, at a slightly slower rate of GDP growth. Those tariff policies from the Trump administration are definitely not helping matters.  The Congressional Budget Office (CBO) recently reported average federal deficits could be over $800 billion a year for some time. By the end of 2018, the federal deficit to GDP ratio was about 4%. For 2019, the CBO estimates a federal deficit around $1 trillion, which could translate to 6% of GDP. If 2020 should be a recessionary year, the common consensus is to increase government spending and perhaps cut taxes. Since tax cuts already happened in 2017, deficit management for 2020 will unnecessarily look worse than it ever should have.

Your vote in 2020 must demand a return to fiscal policy where Congress and the President can make logical and smart economic choices regarding federal deficits and the financial health of our economy. When federal deficits are well-managed, that is when we can truly envision innovation opportunities across the nation, without having to worry about any viable competition.