Debt And Deficits: Nostalgia For The 1980s

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From a historical point of view, you can think of fiscal policy during the Great Recession and the pandemic recession as similar to what happened during the Great Recession and World War II. In both cases, there were two huge stresses within a period of about 15 years, and the federal government addressed both of them with borrowed money. From a historical perspective, those Reagan-era deficits that caused such a fuss were just minor speed bumps. However, what's projected for the future has no US historical equivalent. 

This figure shows projections for annual budget deficits, rather than for accumulated debt. The figure separates out the number of deficits that are attributable to interest payments in past borrowing (blue area). The "primary deficit" (purple area) is the deficit due to all non-interest spending. You'll notice that the primary deficit doesn't get crazy-high: it steadily grows from about 2.5% of GDP in the mid-2000s to 4.6% of GDP by the late 2040s. The problem is that the federal government gets on what I've called the "interest payments treadmill," where high-interest payments are helping to create large annual deficits, and then large annual deficits keep leading to higher future interest payments. 

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If the government could take actions to hold down the rise in the primary deficit over time, with some mixture of spending cuts and tax increases (or does it sound better to say spending "restraint" and tax "enhancements"?), then this could also keep the US government from stepping on the interest payments treadmill.  

This figure shows projected trends for spending and taxes, under current law. You can see the spending jump during the Great Recession, and then the jump during the pandemic recession. Assuming current law, projected tax revenues as a share of GDP don't change much going forward. However, projected outlays do rise.

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