It took a short while, but even groups on the political left have started to realize how Washington’s uncontrolled spending has made life more difficult for American families.
Recently, both The New York Times and International Monetary Fund (IMF) — not known for being conservative — have examined how continuous budget deficits caused by Washington’s spending have worsened inflation problems. They propose a solution based on common sense: if Washington finally gets its fiscal house in order, families in the Heartland will find it easier to restore order to theirs.
Budget Deficits Causing Inflation
The Times reported on the IMF’s warnings about Washington’s borrowing. According to the IMF’s assessment of the American economy, the budget deficit “is out of line with long-term fiscal sustainability” and increases the inflation rate by about half a percentage point.
The Times article also emphasized a point that I have reported on at The Federalist for months: the historically large size of our current budget deficits. By referring to previous reports analyzing the primary budget deficit (excluding interest costs paid to finance prior years’ debt), the Times highlighted the magnitude of the problem Washington has created:
When properly measured, the primary deficit last year was equal to about 5 percent of the economy’s annual output. Data from the nonpartisan Congressional Budget Office [CBO] suggest that it was the sixth-highest primary deficit of any year since 1962; the other five all came during, or immediately after, the pandemic or the 2008 financial crisis.
When The New York Times acknowledges that Washington’s spending is high even by its own standards, that’s not good news for taxpayers.
Vicious and Beneficial Cycles
Another more recent CBO document supported the IMF’s analysis by quantifying the effects of some basic economic factors on the budget deficit. Specifically, the CBO report analyzed how slower productivity growth, slower labor force growth, higher interest rates, and higher inflation and interest rates would increase federal fiscal shortfalls.
In the report, the budget office found that if inflation remains 0.1 percent higher than CBO’s baseline projections over the next 10 years, the deficit will be $263 billion higher than current projections. While federal revenues will increase because more people will be pushed into higher tax brackets (i.e., “bracket creep”), increases in mandatory spending (e.g., higher Social Security COLAs) and interest payments mean that, overall, the budget deficit will grow larger.
This CBO document shows how Washington has created a vicious cycle for struggling families, as well as for the federal government as a whole:
- Deficits resulting from overspending cause inflation to rise;
- The Federal Reserve has to raise interest rates to control inflation, making mortgages much less affordable for the middle class;
- Higher interest rate costs incurred by the federal government cause budget deficits to rise even higher.
This cycle repeats.
But if the past years of massive spending and inflation have created problems for families, they also offer a way to create a positive cycle by reversing those policies. As Jason Furman, who chaired the Council of Economic Advisers under President Obama, told the Times, “to reduce mortgage rates for people, to give businesses the ability to expand and invest and grow, we need to be reducing the deficit.”
Big Discussions Next Year
In the months after the November elections, these patterns will culminate. The expiration of important parts of the Trump tax relief package in the coming year means Congress needs to deal with major issues related to taxes and spending in 2025.
Ironically, Joe Biden has increased spending so much, a large part of it without Congress’s explicit approval, that lawmakers in the following year could cover the cost of making some or all of the Trump tax relief permanent by reversing Biden’s significant spending measures. However, even if (hopefully when) lawmakers take this action, they still need to take further steps to control federal spending. In order to lower inflation and interest rates, the most effective way for families to regain control of their own budgets is for Washington to regain control of its budget. Reports confirm that Washington has created a damaging cycle for struggling families, not to mention the federal government as a whole.
