Prior to the 1980s, the national debt tended to grow at a moderate pace. We experienced spikes in deficit spending during WWI, the Great Depression, and WWII. Otherwise, the national debt remained under control. This all changed starting in the 1980s. The government passed significant tax cuts and substantially increased our military spending as part of the Cold War. Deficits exploded, and the national debt began to climb exponentially. Aside from surpluses in 1998-2001, the government has run significant and growing deficits for the last half century. The national debt eclipsed GDP starting around 2013. Today the national debt sits at 120% of GDP. So why did it all change?
The Government Adopted A Policy That Was Too Good To Be True
In 1974, economist Arthur Laffer introduced a new economic theory. He posited that the government could increase tax revenue by lowering tax rates. This was counter-intuitive. Laffer explained that if the government lowered tax rates, taxpayers would spend their tax savings on food, clothing, housing, etc. This would create multiples of economic activity which would grow the economy and increase the tax base. Laffer reduced his theory to a curve in the shape of an inverted U, known as the Laffer Curve. The top of the inverted U represents a theoretical tax rate where the government optimizes tax revenue and economic growth.
Politicians could not resist Laffer’s theory. They could give their constituents tax breaks and still increase tax revenue. It was pure genius. In the 1980s, President Reagan ran to daylight with Laffer’s theory. You might remember trickle-down economics, which is a first cousin of the Laffer Curve. President Reagan gave wealthy people disproportionately high tax breaks. He claimed the wealthy would spend their tax savings, and it would “trickle down” to the working class. Except it didn’t work. The rich got richer. The working class didn’t receive much benefit. The income gap widened. Our deficit exploded.
President George W. Bush took a similar gamble on Laffer’s theory in the early 2000s. So did our current President during his first term. The deficit grew both times. And not by a little, but by a lot.
Our Government Never Misses An Opportunity To Miss An Opportunity
There are two fundamental reasons why Laffer’s theory did not work in practice. First, the government overestimated the amount of economic activity that tax breaks would generate. It is not as simple as just lowering tax rates and watching the tax revenue pour in. We have to strike a delicate balance. The tax savings need to stimulate enough economic activity to offset the government’s loss in tax revenue. And no one knows where the inflection point is. No one. It is all theory.
In fact, each tax bracket probably has a different optimal tax rate. Someone making $50,000 per year will spend their tax savings differently than someone making $500,000 per year. Dollars spent on food and clothing have a different economic impact than dollars spent on vacations and stocks. We need to account for these and other variables when identifying an optimal tax rate. But no one has figured out how to do it reliably. No one.
Second, every time our government has relied on Laffer to justify tax breaks, it has failed to adequately curb spending. The government has spent our money as if it had already collected a windfall. When the government didn’t reap the windfall, it went ahead and kept spending our money as if it did. The government exercised no fiscal discipline.
Our Government Loses The Irony Of Bobby Bonilla Day
Bobby Bonilla was a great hitter in the Major Leagues from the late 1980s through the 1990s. A switch hitter, he could hit for power and average. He spent his best years with the Pirates but also had productive seasons with the Mets, Orioles and Marlins. He was a World Series Champion, six-time All Star, and three-time Silver Slugger. Baseball fans know Bobby Bo best for the contracts he struck with his former clubs. The Orioles pay Bonilla $500,000 every year through 2028. The Mets pay him $1.19 million on July 1 of every year through 2035. Mets fans ironically celebrate July 1 as “Bobby Bonilla Day.” The irony is that Bonilla retired in 2001. He hasn’t swung a bat in the Major Leagues for almost 25 years. But he is still getting paid.
Our government rigorously follows the Bobby Bonilla model. It pays a whole roster of players that haven’t swung a bat or thrown a pitch in years, even decades. Covid? Still paying for it. The financial crisis? Still paying for it. The war on terror? Still paying for it. The government does not pay off anything it finances these days. It just keeps refinancing the debt by issuing new treasury bonds. Our children and grandchildren will have to pay our debts, and they will garner absolutely no benefit from doing so. They will just be lighting money on fire.
Remember this the next time you hear some policy wonk say deficits are not inherently bad. This is a rhetorical trick. The problem does not arise from a single deficit in isolation. The problem arises when the debt grows exponentially. When the national debt is larger than the economy and grows faster than the economy. When the government continues to make interest-only payments for programs and assets it retired 25 years ago. No rational person would do any of these things.
The Administration And Congress Are Doing The Same Thing Now And Expecting A Different Result
Within the past few weeks, the Treasury Secretary testified at a congressional hearing about the Big Beautiful Bill. A Congressman asked if he could name any economist who thought tax breaks in the BBB would reduce the deficit. The Treasury Secretary quipped, “yes, Art Laffer.” Cute but unpersuasive.
The great majority of economists agree that the BBB will increase deficit spending and will grow our national debt. The explanation is the same as it was 45 years ago. The Administration and Congress overestimate how much economic activity the tax breaks will stimulate. And they continue to spend way more money than they take in. There is no reason to believe it will be any different this time. It truly is the definition of insanity.
Case in point, the President has a council of economic advisers. The council recently published an analysis claiming that the BBB will reduce the deficit by trillions of dollars over time. Buried in the analysis, the council projects that GDP will grow by a whopping 4.6-4.9% for four consecutive years from 2026-2029. To put this in context, GDP has grown by an average of 3.19% over the last 50 years and 2.2% over the last 25 years. We had a spike in GDP growth in 2021 coming out of Covid because GDP had shrunk dramatically in 2020. We have not had a four-year run like the council projects since the 1960s. Projecting GDP growth of 4.6-4.9% for four consecutive years is reckless. This is the President’s penchant for “like never before” hyperbole translated into numbers. And it is the only way the numbers work in the Administration’s favor.
Stop The Insanity
Einstein famously regretted the role he played in enabling the Manhattan Project. He had grave ethical concerns about the invention of the nuclear bomb and the proliferation of nuclear weapons. We can say the same about Laffer and his infamous curve. Laffer developed a powerful economic theory. Then he entrusted it to a species of politicians who are genetically predisposed toward economic exploitation. He is not the Einstein of economic theory; he is the Oppenheimer. He is not a folk hero; he is the architect of our nation’s financial ruin.
Proponents of the BBB are committing economic atrocities in Laffer’s name. They implore us to ignore what we plainly see with our own eyes. They wave their hands in front of our faces like Sith Lords. You don’t see huge deficits … you don’t see huge deficits … They defy common sense. They forget their own history. And they expect us to do the same.
And please remember the government is spending our money. If we don’t like the way they spend our money. If we find it irresponsible. Or if we have grown tired of paying for ballplayers who retired 25 years ago. Then that’s the end of it. No excuses. Full stop. The Administration and members of Congress have to go.