Writing for American Thinker, Heartland Institute Policy Advisors John Merrifield and Barry Poulson note that the long-term path for the United States throughout the first two decades of this century has been ever-increasing government debt and the response to the coronavirus reflects this predilection:
“Over the past two decades, each economic shock has left the country with a greater debt burden, and with a greatly expanded role for the federal government in the economy,” Merrifield and Poulson write. “The economic impact of the coronavirus pandemic has been comparable to a wartime economy. In responding to this recession, the federal government has incurred unprecedented amounts of debt, and has all but abandoned rules-based fiscal and monetary policy.”
The federal government has developed a habit of responding to each economic shock by increasing debt and then failing to dial back spending after each crisis has passed. This will lead to even worse fiscal and economic problems in the years to come, the Heartland policy advisors write:
“The long-term forecast by the Congressional Budget Office is for a continuation of these trends over the next three decades,” Merrifield and Poulson write. “The federal government will account for a greatly expanded share of GDP, and much of this expanded role for the federal government will be financed by debt. Higher debt levels will be accompanied by retardation and stagnation in economic growth. The United States is on the path of other high-debtor countries such as Japan.”
This is a result of deliberate choices, not a function of the size of the United States and its economy, they state:
“[A]nalysis of policymaking in small European nations suggests a more nuanced explanation for their success,” Merrifield and Poulson write. “This is especially true in analyzing the fiscal response in Sweden to the economic shocks in recent decades. Elected officials in Sweden are constrained in fiscal decisions by stringent statutory and constitutional rules. These fiscal rules set explicit targets for balancing the budget, and for reducing debt to sustainable levels. The fiscal framework sets clear budget process rules to achieve these targets. A Fiscal Responsibility Council assures the transparency required for citizens to hold their elected officials accountable. In other words, the attitude of citizens in Sweden toward the fiscal decisions of their elected officials is ‘trust but verify.'”
When the United States had such rules in place, not so long ago, we experienced similar success:
“In the 1990s, statutory fiscal rules were enacted in the U.S. to constrain the fiscal decisions of elected officials. With these fiscal rules in place the federal government not only balanced the budget, but also generated small surpluses to pay down the debt at the end of the decade. The ratio of debt to GDP in the United States was comparable to that in Sweden and other low-debtor countries. Economists refer to the decade of the 1990s as the ‘Great Moderation[‘] in monetary and fiscal policies. Over the past two decades, however, America has virtually abandoned the fiscal and monetary rules in place in the 1990s. The federal government has incurred deficits and accumulated debt at an unsustainable rate, leaving us with one of the highest debt burdens in the world.”
Here’s what that looks like thus far, in a (somewhat grainy) chart published with the story:
Any hope of fiscal prudence is under a further challenge by high-tax, big-spending states clamoring for another big bailout by the federal government, the authors write:
“Support for federal bailouts comes primarily from citizens in high-debtor states that have a high percentage of urban populations, and that stand to capture most of the rent from federal bailouts,” Merrifield and Poulson write. “Citizens in low-debtor states have a low percentage of the population in urban areas, and therefore do not capture as much rent from the federal bailouts. Citizens in states such as Utah that balance their budgets and limit debt are challenging the federal bailouts. Citizens in Salt Lake City are asking the obvious questions about this bailout money. Why should their federal tax dollars be used to bail out elected officials in Illinois who have failed to balance their budget and where debt is growing at an unsustainable rate?”
Individual states should be held responsible for their bad decisions, the Heartland policy advisors write:
“When the federal government addressed similar problems in Puerto Rico, it enacted legislation mandating that Puerto Rico declare bankruptcy in order to restructure its debt,” Merrifield and Poulson write. “If bankruptcy is the solution for Puerto Rico, why is it not the solution for unsustainable debt in Illinois and other high-debtor states?”
Such discipline is probably politically impossible without strict fiscal rules, the authors conclude. Hence, the only alternative to ever-increasing government debt and the aforementioned “retardation and stagnation in economic growth” is for the federal government to adopt rules requiring countercyclical fiscal policies, like those the United States had in the 1990s and those retained in this century by the (rare) European success stories.
