A Few Critiques of Tim Taylor’s Historical Review of U.S. Government Deficits

Tim Taylor summarizes a review of our history of government deficits by Daniel Thorton. I’m a little surprised that neither referenced a 1979 analysis by Robert Barro:

This behavior implies a positive effect on debt issue of temporary increases in government spending (as in wartime) a countercyclical response of debt to temporary income movements, and a one-to-one effect of expected inflation on nominal debt growth.

Tim writes:

For starters, here's a figure showing U.S. annual budget deficits over time going back to 1800. There are five episodes of major budget deficits in the history of the U.S. government: the Civil War, World War I, the Great Depression, World War II, and the last few years. The deficits of the last few years don't match those of the major wars in U.S. history, but as a share of GDP, they do exceed the deficits of the Great Depression.

In other words, Tim is saying what Barro wrote back in 1979 – that the debt/GDP ratio spikes during major wars and severe recessions. Barro argued that US fiscal policy during other periods allowed the debt/GDP ratio to fall over time. My first critique, however, is an objection to this:

Thornton emphasizes that the roots of our current deficit and debt troubles go back well before the Great Recession of 2007-2009, and well before Bush tax cuts earlier in the 2000. Instead, Thornton locates the start of the problems back to about 1970. In the chart of annual deficits, for example, notice that after about 1970 a pattern of volatile but growing deficits emerges.

Brad DeLong was also upset with this passage:

Why 1970--when nothing happens to derange either the pattern of deficits as a share of GDP or the trajectory of the debt-to-GDP ratio--rather than 1980, when the election of Ronald Reagan does change the pattern of deficits and the trajectory of the debt-to-GDP ratio?

Barro and many others including Milton Friedman during the late 1970’s were aware of the fact that we had nominal increases in government debt but they also were aware that the real value of government debt was falling even in absolute terms. Hence Barro’s “one-to-one effect of expected inflation on nominal debt growth”. I would have hoped Tim would have remembered the discussion back then and not fallen victim to what some of us were calling “money illusion” back in my graduate school days. The other quibble comes from Tim’s discussion of the alleged explosion of Social Security spending:

My own take is that it's been clear since at least the 1980s, and arguably earlier, that the U.S. budget was going to run into severe difficulties when the baby boom generation started retiring. The leading edge of the boomer generation was born in 1946, and thus is just now hitting age 65 and heading into retirement in substantial numbers. This demographic shift was going to cause problems for Social Security, but those problems could be dealt with by phasing back the retirement age and tweaking formulas for payments and benefits.

President Reagan’s Social Security commission understood the implications of this “demographic shift” and chose to address it in part by increasing the payroll tax. Why Tim would adopt the Tea Party mantra about scaling back benefits is beyond me as we know that under the Great Recession, the increase in payroll taxes was sufficient to build-up a trust fund for future Social Security benefits. In the way Tim summarizes Thornton’s paper, the blame for Reagan’s shift from “tax&tax and spend&spend” to spend&spend and borrow&borrow (aka the 1981 tax “cut”) and Bush43’s decision to “cut” (more like defer) taxes in 2001 and 2003 appears to get lost. But as Brad notes – this is where much of the blame belongs.