In the 1990s, taxes were raised and the country followed a responsible budget policy. The highest marginal rate was 39.6%. For whatever reason, income inequality continued to surge.
The “responsible” Clinton budgets that resulted in surpluses for the government sector is a misnomer that is mostly touted by Democrats as a bragging point, but most of the Republican leadership knows better. Cheney chided a questioner who asked about the cost of Bush’s war in Iraq with “deficits don’t matter”. He was mostly correct in that observation.
Deficits matter because they are the only net source of dollars for the private sector. When the government spends by creating money it doesn’t disappear into the thin air it was created from. It becomes someone’s assets in the private sector. That Cheney wanted that someone to be himself is well documented after the fact, but that doesn’t change the function of spending into the economy by our currency issuing government.
Deficits can be too large, but they can also be too small, which is never acknowledged by politicians because the national debt and government spending are low hanging fruit for both parties which only differ in how they believe the debt should be paid. Democrats use envy politics and posit that taxing the wealthy is the only answer and Republicans appeal to a general misperception held by most American voters that “their tax dollars” pay for spending on programs that benefit the poor. They don’t and never have, but that’s a tough sell when so much political rhetoric and media attention is focused on spending and taxation.
Tax collections and bond proceeds are destroyed by the debt that created the dollars originally, not recycled to new spending. This created “policy space” to spend when we were limited by the gold standard and fixed exchange rates, but that policy space hasn’t been a factor since we left the Bretton-Woods agreement in ’71 Both are now just ways to reduce the money supply to prevent inflation or achieve social goals, such as reducing inequality, but the sovereign issuer of a fiat currency never “needs” revenue to spend. The only limit to this is available resources that the dollars are deployed to purchase.
Once this is understood the economy can be likened to a bathtub with one faucet and multiple drains. Finding the optimum level of water for a tub is just a matter of matching inflow to the drains, which are trade deficits, wealth accumulation/savings, and taxation. This means using fiscal policy, spending and taxation, to fine-tune the economy, not using the economy to service some arbitrary number that doesn’t mean what people think it means. A budget surplus should only be considered if the economy is running too hot and threatening inflation beyond the Fed’s target.
If the government doesn’t spend more than it taxes there is nothing left in the private sector to compensate for those drains or store value in commerce and people will find it difficult to retire private bank debt unless GDP growth and equitable distribution is sufficient to roll it over. At the first hiccup in such an unbalanced economy, defaults begin to threaten supply chains and banks tighten up, making it all worse. If inflation scares you, you should be terrified of deflation which is how we get depressions that are difficult to stop and take much longer to recover from.
We are doing some really stupid things in our zeal to force the monopoly issuer of a sovereign fiat currency budget as if it were a household and not the only source of money in the economy that is able to retire private debt or be net saved. A good start to correcting this would be to end corporate taxation and FICA deductions. Neither do what people expect of them and both reduce the buying power of consumers with no return to justify that. Corporate taxes only get added to pricing we all pay and funding Social Security or Medicare, benefits is not any more difficult without the payroll deductions than it is now, and we don’t have to argue about non-existent “bond funds” running out.
As the bonds mature they require new money to repay because the payroll deductions only served to reduce the debt. That repayment is hidden in “debt service” but it is not just interest being paid back, Servicing the debt requires new debt so bonds only move money creation forward, not fund anything. Given that the national debt is nothing but an accurate accounting of money created by Congress and not yet used to pay a federal tax obligation it is mostly irrelevant. In fact, considering the little utility that bonds offer, we should probably discontinue issuing them. They are mostly just welfare for the wealthy without a gold reserve to defend.
