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Fiscal Recklessness, 2018 Edition

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I was invited to present a lecture at Middlebury this past week on "Income Tax Policy and Economic Growth." I wanted to present a picture of just how bad the projected federal deficit is for the next decade. The following graph, which shows the last 50 years of data on the unemployment rate and the federal deficit, is what emerged:

Sources: CBO, BLS

The horizontal axis is the unemployment rate, as a percentage of the labor force, and the vertical axis is the federal deficit, as a percentage of GDP. Other things equal, we would expect the line to be downward sloping -- the higher is the unemployment rate, the worse will be the deficit, as both automatic stabilizers and additional stimulus efforts kick in. Each blue dot represents the year indicated over the last 50 years, 1968 - 2018. The best-fit linear relationship indicated by the blue dots is about -1.2: for every additional percentage point of the labor force that is unemployed, the federal deficit widens by about 1.2 percentage points of GDP.

Departures from that general tendency indicate budget policy that was unusually strict (toward the Northeast direction) or unusually loose (toward the Southwest direction). The orange dots are the next 10 years of projections, based on CBO data. Note that there is no recession projected in these data -- the unemployment rate is projected to remain below 5 percent over this decade. Despite this rosy economic projection, the deficit is always about 4 percent of GDP or larger. We will have never had deficits that large as a share of GDP with unemployment that low. Relative to where we were 20 years ago with similar unemployment rates, we are running deficits 5-6 percentage points of GDP larger. That's President Trump's fiscal record.

That is the mess we are in. My main concern is intergenerational equity -- there is no ethical reason to pass along the burden of financing structural deficits to future generations. And then, eventually, there will be further concern if and when the rest of the world decides it is no longer content to allow us to roll over our debt at such favorable interest rates.

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