A Platform Of Sound Economics For RFK To Run On, Part 3

There are two ways to finance large, chronic Federal deficits—either in the bond pits out of private savings or at the Fed’s printing presses out of fiat credit. The former pushes interest rates higher and crowds out growth-fostering private investment, while the latter fuels financial bubbles on Wall Street and CPI inflation on main street.

In practice, deficit financing usually embodies some combination of both, even if neither approach actually adds to overall societal welfare in the long-run. But the problem is that deficit finance has now become a way of life in Washington, and has gotten more chronic and extreme with the passage of time.

The data below is hard to argue with. After the heavy deficit-finance of WWII ended in 1946, Harry Truman actually ran an average +0.73% of GDP surplus during the balance of his terms, including the effect of funding most of the huge spending bulge for the Korean War out of wartime taxes. Likewise, Eisenhower got rid of both the war and the taxes, but not until he had sharply cut military and other spending, too. All told, deficits amounted to a rounding error -0.37% of GDP over his eight years in office.

There was a slight upward drift to an average deficit of -0.88% of GDP under Kennedy-Johnson, but when LBJ’s “guns and butter” deficits got out of hand he implemented a muscular fiscal retrenchment package in 1968 which resulted in a small surplus during his final year in office. From a historical perspective, however, that’s all she wrote in terms of fiscal prudence.

Ever since Nixon freed the Fed to print new credit at will in August 1971, the deficit-to-GDP ratio has climbed steadily higher. The only temporary break was during the Clinton Administration when soaring capital gains tax revenues from the tech boom, and also a major bipartisan deficit reduction bill, reduced the average deficit to just -0.13% of GDP over Clinton’s eight years.

Since then, however, US fiscal policy has tumbled into red ink financing of unprecedented size and persistence. And now the uniparty administrations of Trump and Biden have actually pushed Federal borrowing to truly devastating levels, with Federal deficits averaging nearly 8% of GDP during the past six years.

Average Surplus/Deficit As % Of GDP Under Post-War Presidents (fiscal years):

• Truman (1947-1953): +0.73%;

• Eisenhower (1954-1961): -0.37%;

• Kennedy-Johnson (1962-1969): -0.88%;

• Nixon-Ford (1970-1977): -.2.38%;

• Carter (1978-1981): -2.33%;

• Reagan-Bush (1982-1993): -4.13%;

• Clinton (1994-2001): -0.13%;

• George W. Bush (2002-2009): -3.31%;

• Obama (2010-2017): -4.98%;

• Trump-Biden (2018-2023): –7.85%.

Moreover, contrary to Joe Biden’s phony claim that he has put the Federal deficit on a sharply lower path, US Treasury borrowing is again rising rapidly as depicted in the graph below. The last 12-months run-rate as of June 2023 clocked-in at $2.25 trillion. That’s 8.3% of GDP and came at a time when the US economy is supposedly so strong that it is over-heating with high inflation and an unemployment rate of  just 3.6%.