The oft-cited dilemma of guns and butter, pitting national security commitments against domestic priorities, should be more thoroughly modified as the paradox of arms, revenue, and entitlements. The competing demands of higher defense spending, lower taxes, and bigger entitlement programs increasingly offloaded onto general revenue cumulatively drove deficits over the span of decades, with the result today of deficit normality. Non-defense discretionary spending cannot be wholly excluded from a consideration of factors contributing to deficit normality in the budget sheet. This category of spending rose sharply as a result of the Great Society programs, with the federal government funneling dollars into housing, energy projects, education, and revenue sharing. As a percentage of GDP, it rose higher in recessions, first to 4.4% in 1975 and then 5.1% in 1980. Yet mandatory spending programs, which mainly take the form of entitlements and other benefits (net interest does not count as programmatic spending), rose to 10% of GDP in the same period, twice as high as non-defense discretionary spending.[15] Without ignoring non-defense discretionary spending, this narrative focuses on the major drivers of deficits in the second half of the twentieth century, first defense spending, also changes in the tax code, and then entitlements funded from general revenue.
If the government is to ever return to surplus normality, in which the budget generates surpluses at least in times of solid economic expansion, then the first step in this direction must be correspondingly comprehensive, to address equally defense spending at a sustainable level, a tax code that provides maximum revenue, and entitlements that do not unduly burden the general revenue base. Governance is a messy practice, and no single answer lends itself to the task of better controlling debt and perhaps returning to budget surpluses at some point down the road. But seeing exactly how we reached this point provides greater clarity when conceiving of and implementing future prescriptions.
A situational perspective serves as an effective way to depict the transition to deficit normality. The factors impacting how government spends money and raises revenue occur in real time, the effect of events at home and abroad. Policymakers respond in specific contexts, and often they cannot look beyond short-term horizons. This narrative relies mostly on nominal data not adjusted for inflation from the given period because that is what policymakers were working with at the time. From this approach we can observe how and under what circumstances deficits became normal as each presidential administration contended with new national and international challenges. The focus on presidential and not congressional leadership is unsurprising when considering the accretion of presidential power over the twentieth century. Members of Congress hold great sway during budgetary disputes. Congress must after all pass a budget for the fiscal year before the president signs it into law, and members of Congress may robustly oppose a president with a more relaxed attitude towards deficits. Yet by law the president submits a new budget request early in the new year, and the presidential administration sets the terms of debate over what spending items should be prioritized. In the time frame of 1945 to 1991 the possibilities of successful budget balancing corresponded, with some exceptions, to the inclinations of the administration in office, while members of Congress, even if at times willful and outspoken, tended to assume a more reactive role.
The main narrative ends in 1991 because by that point, at the Cold War’s end, deficits had become normal, even with Congress and the president having worked feverishly to enact more aggressive deficit control legislation. The 1990s came to be regarded as a kind of hiatus from supreme national security threats and great power rivalry, and in the new century the same divergent demands of arms, revenue, and entitlements once again played out but now in a much more heated and vitriolic atmosphere.
A single momentous turning point in history can rarely be discerned, certainly at the time it is supposed to have happened and even decades later. The same holds true for the shift from the surplus to the deficit normative state. But by looking to the factors impacting the budget in the second half of the twentieth century, new military commitments abroad and regional wars, changes in the tax code, and expansion in entitlements, we can gain a better understanding of how this shift came to occur and perhaps how fiscal balance might one day be restored.
Notes
1.
CBO, The 2019 Long-Term Budget Outlook (Washington, D.C.: Congressional Budget Office, June 2019), 1.
2.
CBO, 2019 Outlook, 21.
3.
Ralph L. Nelson, Merger Movements in American History, 1995–1956 (Princeton: Princeton University Press, 1959), 34.
4.
Murray N. Rothbard, “Beginning the Welfare State: Civil War Veterans’ Pensions,” The Quarterly Journal of Austrian Economics 22, no. 1 (Spring 2019): 70–78.
5.
Secretary of Navy, Report of the Secretary of the Navy. 1889. In Two Parts. Part I (Washington, D.C.: Government Printing Office, 1890), 11–12.
6.
Secretary of Treasury, Annual Report of the Secretary of the Treasury on the State of the Finances for the Year 1891 (Washington, D.C.: Government Printing Office, 1891), XXI.
7.
Secretary of Treasury, Annual Report of the Secretary of the Treasury on the State of the Finances for the Year 1892 (Washington, D.C.: Government Printing Office, 1892), XXI.
8.
Secretary of Treasury, Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1905 (Washington, D.C.: Government Printing Office, 1906), 7.
9.
Secretary of Treasury, Annual Report of the Secretary of the Treasury on the State of the Finances for the Year 1890 (Washington, D.C.: Government Printing Office, 1891), XXI.
10.
Douglas A. Irwin, “From Smoot-Hawley to Reciprocal Trade Agreements: Changing the Course of U.S. Trade Policy in the 1930s,” in The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, ed. Michael D. Bordo, Claudia Goldin, and Eugene N. White (Chicago: University of Chicago Press, 1998), 333–35.
11.
Secretary of Treasury, Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1926 (Washington, D.C.: Government Printing Office, 1927), 19.
12.
Secretary of Treasury, Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1924 (Washington, D.C.: Government Printing Office, 1925), 4–5.
13.
B.K. Atrostic and James R. Nunns, “Measuring Tax Burden: A Historical Perspective,” in Fifty Years of Economic Measurement: The Jubilee of the Conference on Research in Income and Wealth, ed. Ernst R. Berndt and Jack E. Triplett (Chicago: University of Chicago Press, 1991), 349.
14.
Secretary of Treasury, Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1970 (Washington, D.C.: Government Printing Office, 1970), 4.
15.