Bad ideas have a way of coming back. In July 2011,
when Congress was struggling with a legal limit to the debt, investor Warren
Buffett quipped to CNBC that he could end the deficit in five minutes by passing "a law
that says anytime there is a deficit of more than 3% of GDP, all sitting
members of Congress are ineligible for re-election.”
There is, in fact, a proposal on social media for a 28th
Amendment to the US Constitution to do just that. It has been making the rounds since 2009 but
now is viral again.
Explanations are in order. The deficit is government spending minus tax
revenues received in that year. For example, suppose that the government
collects $1 trillion in taxes but spends $1.5 trillion. Then the deficit is
$500 billion, or half a trillion dollars.
The deficit is just a loan to the government by
its creditors, mainly taxpayers. It's like the charge that you just made on
your credit card: Visa lent you $40 for a ramen dinner for two on Valentine’s Day,
and you will pay it back at the end of the month. The debt is like your outstanding
balance on your Visa card, say, $10,000. It’s the amount that you would have to
pay today to settle your full debt, that is, to pay off all your loans. On
Valentine’s Day, your debt rose by $40 to $10,040.
The proposal to cap the deficit at 3% of gross
domestic product (GDP, the market value of production on US soil -- a measure of the size of the economy, almost $30 trillion now) probably stems
from a guideline for members of the European Union, in the Growth and Stability Pact. The guideline is
honored in the breach: In the euro area, the deficit ratio in 2023 was 3.6%. Why can't we stick to a 3% ratio?
Well, like any loan, the deficit can be good or bad.
Consider the deficit of 15% of gross domestic product (GDP, a measure of the
size of the economy) in 2020, when Donald Trump was President the first time.
The government was spending to replace private spending lost in the pandemic
shutdowns. Without the deficit, more firms would have had to lay off workers,
and fewer of those laid off would have received money to tide them over until they
found new jobs in a recovery. I would argue that the 2020 deficit was a good
loan.
Likewise, the deficit of 10% of GDP in 2008, when a
global financial crisis blew up, may have kept a severe recession in the United
States from becoming a depression.
Benefits and deficit benders
But usually the deficit occurs because the government
does not receive enough in income tax revenues to pay all Social Security and
Medicare benefits. As the system works, current workers pay for current
benefits. People think that they receive their benefits out of some savings account
consisting of their past tax payments for Social Security and Medicare, but
that isn’t the case. When workers retire, as the Baby Boomers (like me!) did,
the number of workers supporting a typical retiree shrinks, and the benefits become
harder for the government to pay. Congress then borrows from the grandchildren,
by forcing them to pay off the loan when they become working adults.
Whether this is good or bad depends on your point of
view. On one hand, the grandchildren don't have a vote today, so they have no
say in the matter. On the other hand, they are likely to be richer than we are
today, so they can more easily pay off the loan than we can.
In short, the question is not whether the deficit is too large relative to GDP. The deficit may need to run high for a while to address temporary problems like economic crises. The question is whether the debt is too large relative to GDP. The debt consists of all unpaid loans, not just this year's (that's the deficit). If the debt/GDP ratio rises over time, then the investments financed by loans to the government do not generate enough income (and thus income tax revenue) to pay off all its debts, and we have a long-run problem. For example, Congress may borrow $200 million to build a new Interstate. Does the new highway save so much time in production that it generates enough income to pay off the $200 million loan plus interest?
Unfortunately, the debt/GDP ratio is indeed rising. It is 120% of GDP, almost quadruple
the ratio in 1981. The EU guideline is 60%.
But to cap the deficit at 3% of GDP would prevent the government from responding to recessions. Hard times would become harder. As the graph below shows, Congress has usually responded to economic crises by borrowing a lot more than 3% of GDP. The gray vertical lines denote recessions. You can see that the federal budget usually dips deeper into red ink in those periods.
The 3% cap on the deficit is a “solution” that does not address the real problem: For better or worse, Americans want more benefits from the government than they can now afford. Buffett's bromides won't change that. -- Leon Taylor, Seymour, Indiana USA tayloralmaty@gmail.com
Notes
For useful comments, I thank but do not implicate
Annabel Benson.
References
Eurostat. Statistics explained: Government finance statistics. Government finance statistics - Statistics Explained . October 22, 2024.
Barbara Mikkelson. https://www.snopes.com/fact-check/hometown-buffett/ Did Warren Buffett
Suggest This Plan That Could Fix the Budget Deficit? | Snopes.com . October 23, 2011.
