Timothy Taylor discusses an article by Daniel Thornton on the origins of the debt problems in the United States.
Thornton locates the start of the problems back to about 1970. In the chart of annual deficits, for example, notice that after about 1970 a pattern of volatile but growing deficits emerges. The pattern is interrupted for a few years in the late 1990s by the higher tax revenues and lower social spending resulting from the unsustainable dot-com boom, but a return to the larger deficits was coming eventually.
Recall that in this post I said that in the 1960s two taboos were broken. One was a taboo against deficit spending in peacetime. The other was a taboo against Social Security surpluses in order to spend elsewhere.
In deference to the season, I would say that we face the ghosts of deficits past, deficits present, and deficits future. The ghost of deficits past is the debt we accumulated starting in the 1960s in spite of good economic performance and falling defense expenditures (as a share of GDP). The ghost of deficits present is what Keynesians call the “fiscal cliff,” meaning the horrible recessionary consequences that they predict would follow were Congress to actually follow through on its recent commitments to try to reduce deficit spending from currently high levels. The ghost of deficits future is the fact that projections for spending going forward show increases to unprecedented levels relative to GDP, driven largely by health care spending. The ghosts of deficits future mean that (a) we cannot count on a “peace dividend” to solve the budget problem and (b) we cannot easily inflate our way out of the problem (inflation will raise the cost of future obligations and send interest expense soaring).