Fiscal Recklessness, Path Dependence, and Expressive Voting.

• Author: Lee, Dwight R.

Writing in 1977, James Buchanan and Richard Wagner argued that the adoption of Keynesian economic policy in the United States introduced "two subtly interrelated biases ... a bias toward larger government and a bias toward inflation" (Buchanan and Wagner 1977, 99). The resulting political dynamics had resulted in "permanent budget deficits, inflation, and an increasing public-sector share of national income" (72). They worried that "the juxtaposition of Keynesian policy prescriptions and political democracy creates an unstable mixture. The economic order seems to become more, rather than less, fragile--coming to resemble a house of cards" (73).

An additional forty-five years of experience confirm the wisdom of Buchanan and Wagner, as the problems they identified have gotten worse. Consider only one point of comparison: In 1977, the amount of U.S. government debt held by the public equaled 27.1 percent of the gross domestic product (OMB 2022, table 7.1). As of the first quarter of 2022, the federal debt held by the public equaled 98 percent of U.S. GDP (Federal Reserve Bank of St. Louis 2022b).

Our current situation comes after a fifteen-year period of increasingly extravagant borrowing and spending by the federal government. In the first quarter of 2008, the amount of federal debt held by the public was only 36.3 percent of GDP. By the first quarter of 2014, the percentage had more than doubled--to 73.8 percent. It drifted upward past 80 percent in the first quarter of 2020--prior to the fiscal impact of the COVID-19 pandemic. Massive increases in government spending followed in 2020, 2021, and 2022. As this paper is being written, the recovery of the American economy and the defeat of the Biden administration's "Build Back Better" legislation have promised some short-term fiscal relief. Despite this, the longer-run picture remains troubling.

In July 2022 the Congressional Budget Office (CBO) published a long-term budget forecast that predicts the federal debt will reach "110 percent of GDP at the end of 2032--the highest it has ever been," and will continue to climb, "reachjingj 185 percent of GDP at the end of 2052" (CBO 2022b, 5). This forecast assumes that "current laws governing taxes and spending [will] generally remain unchanged" over the period discussed (29). In other words, this forecast and others like it (1) assume that the federal government will remain committed to a policy of deficit financing--what we will call "fiscal recklessness."

The primary question we seek to address is this: Is the American political system capable of calling a halt to this recklessness? Put differently, can American voters be persuaded to vote for candidates committed to imposing greater discipline on government spending? For reasons we explore below, the most likely answer to this question appears to be no.

The paper proceeds as follows:

We first consider the impressive fiscal responsibility of the U.S. government from the ratification of the Constitution in 1789 until the Great Depression and New Deal of the 1930s. During this long period, peacetime federal budget deficits were very few and the federal debt was low except during wars, after which it was soon reduced significantly with steady streams of budget surpluses. It was late in the nineteenth century, after over a hundred years of fiscal restraint, that the political ideology supporting that restraint began to erode, though slowly and with little noticeable peacetime fiscal consequences until the 1930s. Those consequences became more noticeable during the 1930s and again after World War II.

The main thrust of the paper begins with the end of World War II, when we contrast the impressive reduction in the federal debt relative to GDP from 1947 through 1974 with the modest increases from 1975 through 2007, after which the increase in debt escalated. Although one can justify uncommon increases in federal budget deficits and debt during the Great Recession and the COVID-19 pandemic, the size of those increases and the effect of spending ratchets are creating serious doubt about the political willingness to slow, much less reverse, future growth in federal deficits and debts. Calculations based on projections in CBO (2022b) suggest an unfortunate path dependency propelling future federal fiscal excesses during 2022 to 2052.

Throughout the paper we will refer to the influence of political ideology on the decisions of voters. This ideological influence is particularly strong in high-turnout elections, as we explain in the next-to-last section when discussing expressive voting and the opposing influences of what Thomas Sowell (1987, 1995, and 1999) refers to as the constrained and unconstrained visions in the ongoing struggle to limit government power. Concluding comments are offered, culminating in an argument against being too anxious to reduce political divisiveness.

Federal Fiscal Responsibility in the Nineteenth Century

Fiscal decisions were hardly free of controversy in the early years of the United States. In January 1790, five months after Alexander Hamilton became the country's first treasury secretary, he proposed having the federal government assume the war debts of the states. This created a controversy between the three states that had already paid off most of their debts--Virginia, Maryland, and Georgia--and the three that still owed nearly half their debts--Massachusetts, Connecticut, and South Carolina. The resulting Funding Act of 1790 saw the federal government assume responsibility of the states' debts in return for locating the permanent capital on the Potomac River. Almost immediately after the compromise was reached, Hamilton proposed to charter a Bank of the United States despite the opposition of James Madison and Thomas Jefferson, who saw such a bank as a means of reducing the autonomy of the states by concentrating wealth and power in the federal government (Wood 2009, 141-45). This controversy continued long after the deaths of Hamilton, Madison, and Jefferson.

Madison and Jefferson lost their argument with Hamilton, leading to an immediate increase in the federal debt to 30 percent of GDP and a permanent federal debt that allowed the federal government to develop a reputation as a good credit risk by making regular interest payments to debt holders (Wood 2009, 97). Many considered this less than an auspicious start for fiscal responsibility. Yet, it began over a century of federal fiscal decisions that would be considered utopian today by those who fear we are rapidly approaching a federal debt disaster.

Figure 1 shows the amount of federal debt held by the public during the first two centuries of American history along with projections up to the middle of this century.

Despite the federal debt of 30 percent of GDP at the end of 1790 and more than 40 percent of federal revenue being used to pay interest on the federal debt during the 1790s, the debt was reduced to 6 percent of GDP by 1811 (Wood 2009, 97). The War of 1812 resulted in the debt increasing to approximately 10 percent of GDP by 1815. By the early 1820s the debt had been reduced to slightly less than 10 percent of GDP, but what followed was a steady run of budget surpluses that effectively eliminated the debt by the mid-1830s, with fiscal discipline keeping the debt barely above zero until 1860. The debt reached a little over 30 percent of GDP in 1865 at the end of the Civil War, after which the federal budget was in surplus or balanced from 1866 to 1893, which brought the federal debt down to approximately 6 percent of GDP. (2) After 1897 the budgets were mostly in surplus for the next twenty years, which reduced the debt to approximately 2 percent of GDP when the United States entered World War I.

Not all politicians or voters approved of the fiscal restraint exercised by the federal government during the nineteenth century. But enough of the public did to ensure that most successful politicians also accepted that ideology and used it to guide their decisions. That was surely true of Grover Cleveland, who served two terms as president--1885-89 and 1893-97. During his presidency he vetoed 614 bills, many to keep federal spending within what he believed were limits imposed by the Constitution, and only seven were overridden.'1 For example, in 1887, Cleveland vetoed a bill to provide $10,000 to Texas farmers suffering from a serious drought to help them buy seed grain. He stated in his veto message that he could find "no warrant for such an appropriation in the Constitution" (Higgs 1987, 83-84). Imagine a president doing that today and receiving a majority vote in two more presidential elections. (4) Cleveland was unusual in the number of his vetoes, but not in favoring serious fiscal restraints on the federal government. But while Cleveland was vetoing bills to prevent government from expanding control over what had traditionally been private decisions, an ideology favoring such expansions began to emerge during what is now known as the Progressive Era.

The Erosion of Fiscal Restraint Begins

The Progressive Era began as Cleveland's second presidential term was ending in 1896 and lasted until the United States entered World War I in 1917. The erosion of the dominant nineteenth-century ideology was slow during this period and its influence on government spending was not immediately obvious. This is suggested in Higgs's (1987) chapter on the Progressive Era, which is subtitled "A Bridge to Modern Times." This chapter considers much of the political groundwork laid during the Progressive Era that in retrospect can be seen as shifting the prevailing ideology in ways that were barely noticeable at the time.

In the same vein, Calcagno and Lopez (2017, 221) emphasize the fact that around the turn of the twentieth century, "there was increasing pressure by citizens and interest groups to spend federal dollars on safety nets and economic insurance programs." They single out...