The Rise and Rise of Deficit Government

The U.S. federal government followed a balanced-budget policy for 181 years, from its first year of operations in 1789 through 1969. That policy had three components: (1) regular operations were paid for with current revenues from taxes and tariffs; (2) borrowing was reserved for wars, other emergencies such as economic depressions, and investments in national development (territory, harbors, transportation); and (3) debts accumulated for those purposes were paid down by subsequent budget surpluses and economic growth. The policy was followed imperfectly but with impressive consistency. It was supported by a broad political consensus spanning Alexander Hamilton and Thomas Jefferson, Andrew Jackson and Woodrow Wilson, Herbert Hoover and FDR.

Beginning in 1970, the federal government shifted to a budget-deficit policy. A significant and growing share of regular operations was paid for with borrowed funds during good times and bad, in years of peace and prosperity as well as war and emergency. In the 1950s and 1960s, annual budgets had continued to vary between small deficits and small surpluses most of the time—borrowing funded more than 10 percent of spending only in the war years of 1951 and 1968 and the recession year of 1959, and averaged 3 percent of spending over the entire period. Since then, we have run deficits in 48 of 52 years, starting small and going big. Borrowing was 10 percent of spending in the 1970s, 18 percent in the 1980s, 18 percent in the early 2000s. In 2019, the last year of a long economic expansion where a budget surplus would have been in order under the earlier policy, borrowing was 22 percent of spending. It ballooned to nearly half of spending in the pandemic year of 2020 and will continue in that range in 2021 if Congress enacts the Biden administration’s spending proposals.

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