Over the past 90 years, the public has frequently been warned that the US budget deficit would lead to an economic crisis. As in the famous story about the boy who cried wolf, they eventually began to tune out those warnings. And it does no good to cite specific data about the budget deficit rising to hundreds of billions or even trillions of dollars; those figures have no meaning to average people. I suspect that if you polled people on the consequences of an $800 million deficit and an $800 billion dollar deficit, the answers would be similar.

But this time is different, as something important has changed. The wolf is not yet at the door, but it’s getting closer. Over the past 5 years, the US budget deficit has shifted to a more unsustainable path. Matt Yglesias directed me to this tweet by Jason Furman:

The dotted line is upward sloping because deficits are typically worse during periods of high unemployment, which is as it should be. The further above the dotted line, the more out of line the deficit, given the condition of the business cycle.

Back in 2019, I argued that US fiscal policy was the most reckless in US history. It’s not that the budget deficit was all that high (4.6% of GDP), rather it was unusually high given that unemployment was near an all-time low. I knew that things would become far worse in the next recession, although I did not know that the recession would come so soon.  

I stand by my claim that (at the time) 2019 fiscal policy was the most reckless in American history, even though each of the next 4 years ended up being even more reckless. In terms of vertical distance above the dotted line, 2020 was the very worst, then 2021, then 2023 (estimated—red dot), then 2022, and then 2019 (roughly tied with 2009.)

The consequence of the reckless fiscal policy will not be a financial crisis. Nor will it be a default. Even the permanent monetization of the debt is unlikely, in my view. The most likely consequence will be higher future taxes and slower economic growth. This will lead to reduced living standards. It might also push politics in a more “populist” direction, with consequences that are difficult to predict (but unlikely to be desirable.)

P.S. The distinction between higher taxes and lower spending is less clear than you might assume. Thus one option is a $1000 tax increase on rich people. Another option is a $1000 cut in Social Security benefits for rich people. The first represents higher taxes while the second is lower spending. But the consequences for implicit marginal tax rates are quite similar.

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