America's Fiscal Constitution

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Authors: Bill White
growth helped reduce debt’s burden after five previous spikes in debt. After each use of those emergency borrowings, the federal government balanced budgets and usually paid down debt.
    Debt-financed federal spending is not necessary for economic growth. It might temporarily help in a downturn so severe that traumatized citizens and business are reluctant to consume or invest. In that circumstance, however, debt can be monetized with little risk of inflation. Modest federal borrowing during less severe downturns should not interfere with long-term growth as long as the debt is repaid or can be monetized without inflation after recovery. The goal of balancing budgets across each economic cycle was a modern variation of traditional “pay as you go” budget planning. The concept worked better in theory than in practice because federal officials were reluctant to conclude that any economic recovery was complete enough to justify moving a budget into surplus.
    There are, of course, ways in which the public sector can contribute to economic growth without mortgaging the future. State laws foster durable contracts and property rights. State and local governments provide a reasonable measure of safety from crime and build most infrastructure. Few doubt that broad-based improvements in knowledge and skills can raise productivity and promote long-run growth, even though many believethat state and local investments in public education can be made more efficiently.
    One could argue that all Americans contribute to the economy by waking up each day, but staying alive is hardly a prescription for growth. Similarly, various federal activities make valuable contributions to national welfare and can be justified without exaggerated claims concerning their contribution to growth.
    Federal programs that do facilitate growth—such as the funding of an interstate highway system, airports, marine facilities, regulation of the spectrum used for wireless communication, and scientific research—are often funded using trust funds financed with dedicated taxes and account for only a small percentage of overall federal funds spending. Annual federal expenditures supporting economic development—such as investments in education and infrastructure—should not require debt financing.
    Strong economic growth has often occurred when the federal government balanced its budgets. The nation grew rapidly in its first thirty-six years, a period in which it paid off its debt entirely. The economy also experienced high rates of growth when surpluses were used to pay down debt in 1844–1857, 1878–1893, 1900–1915, and 1921–1929. Since World War II the nation experienced three long periods of economic growth: 1946–1957, 1961–1974, and 1984–2000. In each of those periods the share of national income devoted to all federal taxes—federal funds and trust fund revenues—rose modestly as a share of national income as the economy grew. In contrast, during 2001–2012 private sector employment stagnated despite higher borrowing levels and lower federal tax receipts as a share of national income.
    Bursts of economic expansion at times accompanied spikes in wartime debt (e.g., 1917–1918, 1941–1945, and 1965–1974) or recovery from severe downturns (e.g., 1933–1937, 1976–1979, 1984–1989, and after 2009). Those circumstances do not justify routine borrowing in, say, 2013, when national income hit a record high.
    Long-run economic growth depends on factors that do not require federal debt, most notably an increase in the size and productivity of the workforce. Federal borrowing will not change the plight of citizens who have fallen behind in international competition for high wage jobs. Taxing domestic employment in order to pay foreign creditors cannot possibly generate greater long-run opportunities for American workers. Publicborrowing that diverts savings from private investment does not enhance productivity.
    Despite the verdict of history,

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