Tracing the Roots of Today’s Fiscal Policy: How Systematic Deficits Got Their Start

US federal debt held by the public is at a peacetime high of 75 percent of GDP, and the Congressional Budget Office (CBO) expects it to reach 86 percent by 2026 before soaring to 155 percent by 2046. Similarly, CBO projects annual deficits to triple in the next decade, from $438 billion in 2015 to $1.36 trillion in 2026. Entitlements and interest are the most widely discussed drivers of this fiscal outlook. However, the roots of today’s fiscal problems go much deeper, both historically and politically.

When looking at the history of deficits and debt, most studies focus on the modern budget era (1974 onward) using either inflation-adjusted dollars or debt as a percentage of GDP. Instead, in a recent Mercatus Working Paper, the authors present deficits and debt using dollars not adjusted for inflation, going all the way back to the nation’s founding, because the nominal figures offer a way to compare short-term fiscal patterns over a long period. Calcagno and Lopez find that deficit patterns gradually transform from infrequent deficits during emergencies to systematic deficits every year.

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