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The Irresponsibility Tax

Brad DeLong, notes that Ron Suskind’s book, written with the assistance of Paul O’Neill, quotes Vice President Dick Cheney as saying "Reagan proved deficits don't matter."

In at least one obvious way, deficits certainly do matter. When the government borrows money to finance the budget deficit, taxpayers must pay interest on that borrowing. Currently, interest on the national debt runs at about 4.5%. This year we will run a budget deficit of more than $520 billion. Taxpayers will be stuck paying interest charges of $23 billion on this year’s deficit. Those interest charges will be due each year until we run a surplus to pay off the debt.

That does not mean that it is always wrong to run a deficit. Budget deficits can be good. Deficit spending is the classical Keynesian way of stimulating the economy. If timed correctly, deficit spending can help pull the economy out of a recession or at least soften the blow.

What is irresponsible is to run deficits to stimulate the economy in bad times but not to run surpluses once the economy is humming. Such a policy just continually adds to the debt and forces taxpayers to keep on paying interest charges. One might term those interest payments an Irresponsibility Tax.

The NERB tracks the business cycle. The last full cycle, measured from trough to trough, ran from March 1991 through November 2001. As that roughly coincides with the two Clinton terms, I will call that the Clinton Cycle. How was fiscal policy handled in that cycle?

In the early part of the cycle, FY 1992, we ran a substantial (then record) deficit of $290 billion. That deficit was gradually decreased to balance and then surpluses were run until the next trough:

FY 92 -- ($290)
FY 93 -- ($255b)
FY 94 -- ($203b)
FY 95 -- ($163b)
FY 96 -- ($107b)
FY 97 -- ($21b)
FY 98 -- $69b
FY 99 -- $125b
FY 00 -- $236b
FY 01-- $127b

Over the entire cycle, the budget netted a deficit of $319 billion. I would prefer a net of zero but given that the cycle started with the largest deficit in history (in dollar terms), that is not too bad. The shape of the curve is almost exactly right. Run deficits in bad times to stimulate the economy then, as economic growth returns, shrink the deficit until finally running surpluses to pay off the debt incurred at the beginning of the cycle.

We are currently paying about $15 billion per year in interest for the debt incurred in the Clinton cycle. Thus, the Irresponsibility Tax imposed by fiscal policy during the Clinton Cycle costs us roughly the same amount as NASA.

The business cycle immediately proceeding the Clinton cycle ran, trough to trough, from November 1982 though March of 1991. I shall call that the Reagan Cycle. How did we do in the Reagan Cycle?

FY 83 -- ($207b)
FY 84 -- ($185b)
FY 85 -- ($212b)
FY 86 -- ($221b)
FY 87 -- ($149b)
FY 88 -- ($155b)
FY 89 -- ($152b)
FY 90 -- ($221b)
FY 91 -- ($269b)

We never got close to balancing the budget during the good times of that cycle. The result of that failure is that we never paid off any of the debt we incurred during the bad times and we have been left paying interest on that debt every year since. We will continue to pay such interest into the foreseeable future.

The Reagan Cycle deficits total about $1.77 trillion. At current interest rates, the Irresponsibility Tax imposed by Reagan Cycle fiscal policy is about $80 billion per year.

We have been paying that Irresponsibility Tax for 13 years now, meaning that we have paid almost a trillion dollars in Irresponsibility Taxes from the Reagan Cycle.

We recently had a debate about whether or not it was a good idea to spend $400 billion over 10 years for a prescription drug benefit for Medicare. The Irresponsibility Tax from the Reagan Cycle is about twice that expensive.

What about our current cycle? It began in the fall of 2001. We do not yet know when it will end. Mr. Bush has put forth a budget that projects out through FY 2009. That budget is widely seen as overly optimistic. Let’s be hopeful and assume that it is an accurate forecast. What, then, will be the Irresponsibility Tax from the Bush Cycle?

If we look at actual performance for FY 2002 and 2003 as well as President’s Bush’s forecast for FY 2004-09, we get the following:

FY 02 -- ($157)
FY 03 -- ($375)
FY 04 -- ($521)
FY 05 -- ($364)
FY 06 -- ($268)
FY 07 -- ($241)
FY 08 -- ($239)
FY 09 -- ($237)

Thus, if everything goes right and we do not slip back into recession before 2009 and we do not have any other wars, and there are no costs in Iraq or Afghanistan after this year, and we do not fix the AMT problem and Congress abides by spending recommendations, we will be approaching the end of the Bush Cycle with no hope of paying down any of the debt incurred at the beginning of the cycle. Indeed, Mr. Bush hopes that we will be paying interest on “only” an additional $2.4 trillion dollars. If rates remain fairly low and we can service that debt at, say, 5%, the annual Irresponsibility Tax for the Bush Cycle will be $120 billion each and every year until we begin running surpluses.

The total Irresponsibility Tax for those two cycles will be about $200 billion per year. To put that in perspective, the Irresponsibility Tax from the Reagan and Bush Cycles will be larger than Mr. Bush’s proposed discretionary spending for NASA, the Department of Agriculture, the Commerce Department, the Department of Education, the Energy Department, HUD, the Interior Department, the Justice Department, the State Department, and EPA combined.

There are about 100 million tax returns filed each year. The Irresponsibility Tax for the Bush and Reagan Cycles will amount to about $2,000 per year for each taxpayer and will continue every year. That payment of $2000 will buy the taxpayers exactly no military equipment, no homeland security, no veteran's benefits, no prescription drugs for grandma, no research for a cure for autism, no health care insurance, no meat inspectors, no air traffic controllers, no nothing.

Halliburton paid Mr. Cheney almost $50 million when he was CEO. Perhaps an Irresponsibility Tax of $2000 per year “doesn’t matter” to him. For a middle-class family trying to make ends meet and save for retirement and their kids' college, a $2000 per year Irresponsibility Tax matters a great deal.

Posted by Dwight Meredith at February 19, 2004 07:07 PM | TrackBack