Time to Put Our Fiscal House in Order

The two bitterly opposed presidential candidates, Kamala Harris and Donald Trump, have tacitly agreed on how to deal with our most pressing domestic policy problem — ignore it. The federal government last fiscal year spent $1.7 trillion more than it received in revenues — $5 billion a day. While both candidates have touted an abundance of new spending plans, and even some tax hikes (higher tariffs by Trump, big corporate and individual income tax increases by Harris), neither has uttered a memorable word about the need, much less a plan, for eliminating massive budget deficits. 

So what? Huge public indebtedness usually leads to economic weakness and decline. The Romans learned this in the early centuries of the Christian era. More recently, once rapidly growing nations like Argentina are shadows of their former selves because of profligate spending financed by printing or borrowing money. From the 1960s through the 1980s, Americans feared Japanese industrial prowess would threaten America’s economic supremacy. But Japan soon began massive deficit borrowing, creating a national debt relative to national output more than double that of the U.S. It created three “Lost Decades” of economic stagnation, eroding Japanese economic power, prestige, and living standards.

Other things being equal, bigger budget deficits mean lower economic growth. In the United States in the 1960s, federal deficits typically were small — less than 1 percent of GDP — with the national debt actually declining in relation to the nation’s growing output. The median annual growth rate in real GDP exceeded 4.5 percent. By the 1990s, annual deficit financing was growing considerably, typically over 2.5 percent of GDP and, not surprisingly, annual economic growth had slowed to a median 3.3 percent. (READ MORE: Budget and Debt Scenarios: Politicians Should Care)

Fast forward to the first half of this decade. Despite general prosperity and low unemployment (other than the COVID pandemic), deficits have soared to usually around 6 percent of GDP. Output growth has further deteriorated, with median annual real GDP growth for the five years ending this December probably around 2.5 percent.

Before 1930, we had an unwritten fiscal policy that effectively prohibited borrowing except during wartime emergencies. Until 1930, 96 of the first 140 federal budgets ended in surplus. By contrast, in the 2024 fiscal year, the nation had its 23rd consecutive year of deficits.

My profession of economics deserves much of the blame for this rise in deficit spending — John Maynard Keynes and his disciples argued that government spending, financed by borrowing, could stimulate aggregate demand and reduce unemployment. That has helped created an environment for politicians where it is typically far riskier politically to finance new spending with taxes and other revenues than with borrowing. Deficit financing thus has become a superb incumbent protection device. The political gains associated with greater government spending exceed the political losses associated with budget deficits that Keynesian economists claim have relatively benign economic effects.

What to do? We restrict drunks from driving, and hormone-charged teenage boys from entering girl’s locker rooms, so why can’t we also curb Congress? Why not emulate the 49 states that have constitutional prohibitions, with limited exceptions, on deficit spending? 

To be sure, our Founders did a great job with our Constitution, appropriately making it difficult to amend. There have been only 27 amendments ratified since the Bill of Rights was enacted 233 years ago — the last became effective in 1992. Under Article Five, there are two ways to propose amendments to the Constitution: one through the states and the other through Congress. In the 1980s and 1990s, several attempts at a federal balanced budget amendment achieved near success using both amendment approaches. They ultimately failed. The need for one has since grown substantially, though paradoxically national interest in such an amendment has declined dramatically. 

However, any attempt to constrain government spending will be fiercely opposed by progressives, and likely many creative stratagems would be employed to circumvent any new constitutional limits imposed on federal expenditure. But the consequences of high deficits are severe — more even than a slowing of economic growth and the lowering of living standards for future generations of Americans. For example, without new budget constraints, the American dollar will likely lose its primacy among world currencies as our credit rating declines. (READ MORE: After the US Credit Downgrade, Let’s Talk About a Radical Budget Change)

Perhaps it will take a prestigious, relatively nonpartisan federal commission of mostly nonpoliticians to devise a balanced budget amendment to present to Congress and the states for approval. The time has come to put our fiscal house in order. 

Richard Vedder is Distinguished Professor emeritus at Ohio University and Senior Fellow at the Independent Institute.

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