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Budget deficit illustration
When critical economic topics like the national debt come up, whether on the campaign trail, in debates, or media coverage, the tone and tenor of campaign rhetoric usually leads to over-simplification. The debt is typically presented simply as a scary number—currently it is $34 trillion, or 123% of GDP (one year's national income)—and political parties and candidates are compared on their contribution to that total.
Not all debt is created equal, however. The merit of borrowing for government spending depends on how the money is spent, i.e., whether it is spent on assets the economy needs to function and grow and that will, in turn, contribute to the future ability to repay that debt vs. debt-generating tax cuts that simply transfer income and wealth from some taxpayers to more favored groups.
Essential Borrowing: Emergency Management
Some borrowing is essential when war or large natural disasters strike, such as World War II, the pandemic of 2020-21 or Hurricane Katrina. Only the Federal government is large enough to coordinate a response and to finance that response through its borrowing capacity. Accordingly, both the Trump/Pence and Biden/Harris administrations borrowed heavily to respond to Covid. The responses to the pandemic—subsidies to small businesses, the self-employed, states and municipalities, as well as vaccine development, mass production of incubators, masks, temporary hospitals and morgues—are all expensive. Such disasters suppress economic activity; raising taxes to respond to the disaster would suppress it further—not a good option.
Debt by choice: Trump/Pence v. Biden/Harris
While emergency management leaves little choice but to borrow, the interesting comparisons among political parties and their candidates are the decisions to borrow when there is choice. Of particular interest at this moment: Trump/Pence borrowed 4.8 trillion dollars for non-Covid spending, mostly to finance the tax cut of 2017. Biden/Harris borrowed 2.2 trillion dollars for non-Covid spending, mostly to repair, replace and maintain trillions of dollars’ worth of infrastructure.
Two Very Different Cases
In the present case, both Trump/Pence and Biden/Harris have incurred rather substantial deficits by choice during their administration. Trump’s deficit began with the massive 2017 tax cuts to benefit the after-tax income of high-income taxpayers. Tax cuts for the rich have frequently been justified on the hypothesis that tax cuts “pay for themselves,” i.e., reduce the deficit rather than add to it. This remarkable “supply-side” hypothesis describes a series of steps: the tax cut permits greater investment in the productive assets of the market economy; that investment generates economic activity and jobs, in turn profits and wages, which generates tax revenue to the government greater than the revenue lost to the cut itself, resulting in deficit reduction.
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This hypothesis has been tested often and succeeded once in the 1960s when top tax rates before the cuts were confiscatory rates in the 90% range. But when tax rates are lower, in the more reasonable 20-40% range, the hypothesis has failed the test. Cuts do not pay for themselves. Instead, cuts within that range of tax rates result in a debt-financed tax cut that transfers wealth from all taxpayers to those who are beneficiaries of the cut.
By contrast, Biden/Harris spent borrowed money to repair and up-grade infrastructure, transforming the borrowed money into productive assets: streets, roads, freeways, bridges and tunnels, as well as sewer and water systems, school buildings, government buildings, airports and harbors. These are assets that the free market system needs but will not produce for itself. They are the responsibility of some level of government—state, local or federal—and are necessarily paid for with taxes.
Borrowing to pay for durable physical assets is not an income and wealth transfer, but an investment in the physical assets that will be “public goods,” i.e., shared resources that will boost future productivity, facilitating the repayment of the borrowed money.
Town Hall Questions
It is difficult for reporters and debate moderators, let alone audience members, to formulate questions about the national debt. Here is a suggested question to be posed to office seekers: “Is the spending you propose to finance with borrowed money expected to generate a pro-growth return on investment for the public, or does it promote consumption instead, leaving future tax payers with the obligation to repay the debt, but with a minimal additional productive asset base from which to enhance their ability to repay.” Cue the popcorn.
