Deficit Reduction. Is It Reality Or A Mirage?

Recently, the Biden Administration started taking victory laps on deficit reduction. Of course, the deficit remains the bully-pulpit of fiscal conservatives, so going into a mid-term election, it is not surprising to see it used for political advantage.

“The bottom line is the deficit went up every year under my predecessor, before the pandemic and during the pandemic. And it’s gone down both years since I’ve been here – period. That’s – they’re the facts.

And why is it important? Because bringing down the deficit is one way to ease inflationary pressures in an economy where a consequence of a war and gas prices and oil and food and – it all – it’s just a different world right this moment because of Ukraine and Russia. We reduce federal borrowing and we help combat inflation.

This process [progress] is a great deal – is good news, but it didn’t happen by itself. The previous administration increased the deficit every year it was in office, in part because of its reckless $2 trillion tax cut. I know you’re tired of hearing me saying that, but a $2 trillion tax cut that was not paid for. Was not paid for. And a tax cut that largely benefited the biggest corporations – 55 of which earned $40 billion in profits and paid not a single penny in income tax in 2020 – and wealthiest Americans, like the billionaires who on average pay just 8 percent in federal taxes.” – President Biden

While the President is trying to claim credit for falling deficits, a recent Congressional Budget Office report suggests something entirely different.

However, before we get to the CBO report, some background on the deficit.

Deficit History

During most of the last 122 years, the U.S. economy ran with little or no deficit. However, President Reagan engaged in significant debt use to restart economic growth following two back-to-back recessions. Such was Keynesian economic theory in action as the Government engaged in spending to jumpstart economic growth.

It worked. However, politicians only heard the “spend money” part.

Following President Reagan, each Administration used debt to fund mostly unproductive investments, increasing the Federal deficit. Not surprisingly, the consequence of increasing debt and deficits was slower economic growth.

Deficit Reduction, Deficit Reduction. Is It Reality Or A Mirage?

Notably, the decline in economic prosperity adds deflationary pressures on the economy. Such is the problem as the surge of inflation is not a function of more robust economic growth, as seen previously. Instead, the inflation directly resulted from the surge in deficit spending by the Government during the pandemic.

Deficit Reduction, Deficit Reduction. Is It Reality Or A Mirage?

As discussed in “Inflation Is A Monetary Phenomenon,” the monetary injections were the sole reason for the price surge. To wit: