Warning Signs in US Deficits

The US federal government running a budget deficit is not new. It has run a deficit in each of the last 22 years. Since 1930, it has run a deficit in 84 out of 95 years.

What is new is the size of the annual deficits and the pace at which they are growing, which suggests that not only is the trend not reversing, but is getting worse.

Recurrent high deficits have negative consequences. They crowd out private investment, result in lower economic growth rates, contribute to inflation, and constrain the country’s ability to invest in new priorities and respond to challenges.

A look at empires of past show that their end is often correlated with financial decline. It is too early to say whether the US is headed in this direction, but warning signs abound and policymakers should right the ship before it is too late.

Size of the US Federal Government Deficit

Since 2003, the US government has annually spent, on average, 34% more than it has collected in revenue. The federal debt is nearly $35 trillion, roughly 120% of GDP.

Research shows that debt-to-GDP ratios in excess of 90% are associated with lower economic growth rates.

As a result, net interest expense is now 10.7% of total annual outlays, close to what the government spends on defense. Higher interest payments are a drain on finances that will force the government to run even higher deficits to maintain programs — fueling a vicious cycle — or to reduce spending to prioritize paying interest.

Much of this spending has been fueled by successive crises including the War on Terror, the financial crisis, and the COVID pandemic, and the government’s responses to ease the burden on US citizens.

Long term financial strain will come from entitlement programs. By 2054, the government estimates that spending on mandatory programs such as Medicare, Medicaid, CHIP, ACA, and Social Security will comprise 16.2% of GDP.

As a result, spending on discretionary programs will decline to less than 5% of GDP. This means investment in research and development such as drugs, space, AI, quantum computing, and other novel technologies will stall. So will investment in revitalizing America’s infrastructure to drive economic growth.

Why Fiscal Responsibility Matters

History shows that all empires eventually end. The causes vary, but can usually be traced to a combination of economic decline and military over-extension.

By the third century, Rome was bankrupt and resorted to extreme measures such as currency debasement, confiscations, and requisitions in kind. This bankruptcy resulted from the expanding needs of the army, alongside a “swollen bureaucracy” and “extravagance of the court,” as per historian Andre Piganiol.

The financial crisis coincided with an economic collapse, including the hollowing out of cities and professions, return to agrarian lifestyles, and displacement of trade routes.

Financial failure was only one factor leading to Rome’s fall. Piganiol lists 9 others: climate crisis resulting in draught; demographic crisis resulting in population decline; political crisis stemming from the ineptitude of the ruling class; religious strife between pagans and Christians sects; and so on. But it was a critical one upon which Rome’s military prowess and ability to serve its people rested.

US policymakers should learn from empires of the past, and create a path to a more sustainable financial and economic future.

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