Do $1 Trillion Deficits Matter?

Late last week, we learned that the U.S. budget deficit widened to $984.4 billion in the fiscal year ending September 30, its highest level in seven years. (As a reminder, the deficit is a simple annual calculation of the money the government takes in, minus the money government spends.) The Trump administration and the Congressional Budget Office expect the deficit to rise over $1 trillion in the 2020 budget year, which began October 1 and the CBO estimates that the deficit will stay above $1 trillion over the next decade.

Although the number, a trillion (that’s a one, followed by 12 zeroes), is a biggie, we have seen it before. From 2009 through 2012, when the government was spending money to bring the country back from the brink and tax receipts were sagging because the labor market was weak, there were four consecutive years when the budget deficit topped $1 trillion. But that was seen as emergency, break the glass kind of spending.

The deficit has soared by nearly 50 percent since Trump took office, due to increased government spending and the $1.5 trillion tax cut passed in 2017, which has not “paid for itself” through higher rates of growth. In fact, after just one year of 2.9 percent growth in 2018, GDP is set to return to the post-recession pace of about 2 to 2.25 percent. That’s far below what Treasury Secretary Steven Mnuchin predicted just 15 months ago, when he said the economy was "well on this path” of 3 percent annual growth “for several years.”

While many economists note that it’s strange to see budget deficits balloon during an expansion, perhaps a more relevant question is: what’s the downside of trillion-dollar deficits?

According to the nearly extinct species of deficit hawks, (remember Paul Ryan?), the problem with big deficits is that they add to the national debt, and then at some point, that debt burden might get tough for the government to manage. At the boiling point, the government has few tools, so it might have to print more money to make payments, which will create inflation, push up interest rates, lead to slow growth and in the extreme, create a full-blown debt crisis.

So far, the doom and gloom budget deficit/debt fears have yet to materialize. That doesn’t mean that something bad can’t happen in the future, but for most of us, the impact of the trillion-dollar deficit is muted.