How Entitlements Ate Our Future
By Christopher DeMuth
This article appears in the Summer 2024 issue of the Coolidge Review. Request a free copy of the print issue.
The Hamiltonian norm is a norm of monetary policy: Manage federal debt to sustain a trustworthy credit record and a stable national currency. There is a complementary norm of fiscal policy—the balanced budget norm. It goes like this:
Fund regular government operations with current revenues from taxes and tariffs.
Borrow only for investments and in response to emergencies: wars, natural disasters, severe economic downturns.
Reduce accumulated debts over time through budget surpluses and economic growth.
The two norms are complementary because borrowing for public investments and crisis response is, in theory, financially sound, and these recurring needs generate enough borrowing to allow continuous participation in credit markets and a debt-supported currency.
The balanced budget norm was a matter of bipartisan consensus, and followed with fair consistency, from 1789 through the 1960s. It was practiced by Alexander Hamilton and Thomas Jefferson, Andrew Jackson and Calvin Coolidge, Herbert Hoover and Franklin Delano Roosevelt. Jackson, our first populist president, retired all the debt remaining from the Federalist period. FDR, who borrowed heavily during the Great Depression, took care to distinguish deficit spending on Depression relief from tax-supported spending on regular government.
Both norms are rules of conduct, not guarantees of success. Many public investments fail, such as contemporary spending on green energy and bullet trains to nowhere. New Deal Depression spending was often ineffective or counterproductive. Wars present incalculable risks and, win or lose, may fail to improve future security and prosperity.
But during the long reign of our two norms, theory and practice coincided sufficiently to prove their utility. The federal government made several spectacularly successful investments: Hamilton’s assumption of Revolutionary War debts to secure the status of the fledgling regime, Jefferson’s borrowing to purchase France’s Louisiana Territory from a desperate Napoleon, Ronald Reagan’s borrowing for a huge military buildup to convince the Soviets to throw in the towel.
Deficit spending to sustain jobs and incomes during depressions was often vindicated, as economic growth and tax revenues rebounded and the debt returned to manageable levels. In times of peace and prosperity, political leaders, including Coolidge and Jackson and many lesser figures, invoked the primacy of budget discipline, and the obligation not to burden future generations, to defeat an endless parade of popular spending initiatives.
Over the past fifty years, we have abandoned the Hamiltonian and balanced budget norms for a new set of norms: massive spending on welfare and entitlement benefits, deficits in good times and bad, staggering accumulated debt, monetary instability, and recurring financial crises. A prominent student of the transformation, Nobel Prize–winning economist James Buchanan, thought the shift resulted from a loss of moral responsibility on the part of both leaders and citizens.
But if we examine the 1960s and 1970s—the decades of transition from the old norms to the new—we can see two more particular causes at work.
Politicians concluded that spending should be determined not by revenues on hand but by aspirations for an imagined future.
ASPIRATIONAL SPENDING
The first cause was intellectual—the idea of “fine-tuning” the economy.
John Maynard Keynes, writing during the Depression, had subscribed to the balanced budget norm. He advocated deficits during depressions balanced by surpluses when the economy recovered. But his sophisticated rationalization of an established practice inspired academic apostles to go further in the 1950s. If we could calibrate government budgets to help get through a depression, why not use them to manage the economy’s ups and downs in normal times? Taxing and spending should be set not to balance each other but instead to balance the entire national economy, by responding to fluctuations in inflation, unemployment, productive capacity, and other statistical measures.
Fine-tuning arrived at the White House in 1961, when President John F. Kennedy appointed University of Minnesota economist Walter Heller as chairman of the Council of Economic Advisers. During JFK’s first two years in office, the economy grew at an average rate of more than 4 percent annually, and the budget deficit averaged more than $5 billion per year. But Heller thought the economy could do better if the federal government reduced taxes, even if that change enlarged the deficit.
Kennedy, an old-fashioned budget balancer, wanted to continue whittling away at the World War II debt as President Dwight Eisenhower had done. But Heller was persistent, and he was the sort of brilliant, socially engaged intellectual whom JFK admired. The president eventually went along, proposing his epochal tax cut in early 1963. It was enacted a year later under President Lyndon Johnson, in the wake of Kennedy’s assassination.
The federal budget, which had varied between small deficits and surpluses since World War II, turned to regular deficits. The deficits were initially small, and total debt continued to fall as a share of growing national output (that growth helped along by the tax cuts). But inflation soared—from 1 percent in 1961, to 3 percent in 1966, to 6 percent in 1970.
And in 1968 the deficit jumped to more than 14 percent of spending for the first time since World War II. LBJ’s “guns and butter” policy meant large spending increases for the Vietnam War and an array of domestic initiatives—the War on Poverty, the Great Society, new Social Security benefits, and the enactment of Medicare and Medicaid.
This was not fine-tuning, and Walter Heller resigned and went back to university life.
But a Rubicon had been crossed. The idea had taken hold among practicing politicians that spending should be determined not by revenues on hand but by aspirations for an imagined future. And politicians, once they had learned that spending could be geared to their aspirations, turned out to be more imaginative than academic economists.
Entitlement spending expanded faster than anyone had expected.
THE EVANESCENT SURPLUS
The second cause of the balanced budget collapse was political—the electoral magic of borrowing to fund welfare and entitlement payments to individuals.
When Richard Nixon took office in 1969, he began winding down spending on the Vietnam War and LBJ’s Great Society programs. The budget turned to a surplus that year, and the Budget Bureau projected “peace and growth” dividends for many years to come. When President Nixon proposed his own welfare expansion in 1969—the Family Assistance Plan—he and everyone else assumed it would be funded by current, indeed surplus, tax revenues.
But it was not to be. By August the projected future surpluses were starting to look like deficits. Nixon’s top domestic aide, Daniel Patrick Moynihan, briefing the press at the Western White House on the Pacific coast, said that “the peace dividend tends to become evanescent like the morning clouds around San Clemente.”
What was happening? The 1960s Social Security sweeteners plus Medicare and Medicaid were expanding entitlement spending faster than anyone had expected. This period marked the beginning of a historic transformation. Starting in 1970, big deficits became routine in years of peace and prosperity as well as war and recession.
Nixon and his economists were not fine-tuners, but they came up with their own ways to rationalize deficits. Thus, the “Full Employment Budget” meant a deficit budget that would be balanced if more people were working and paying taxes rather than drawing benefits.
The deficits soon outpaced the euphemisms. Deficits averaged 10 percent of spending in the 1970s and grew to 18 percent in the 1980s. Since the COVID year of 2020, when the government borrowed nearly half of what it spent, deficits have settled at 20 to 25 percent of spending.
Political advocacy often proceeds as if worthy government initiatives are cost-free.
THE NEED TO MAKE CHOICES
Other steps taken along the way have contributed to the federal government’s unchecked deficit spending. As James Grant shows, President Nixon’s taking the dollar off the gold standard in 1971 was an important factor. But we can’t overstate the significance of the growth in welfare and entitlement spending.
Benefits to individuals accounted for 36 percent of federal spending in 1970; by the mid-1970s the figure had surpassed 50 percent; now they account for more than 75 percent of spending—and the share keeps growing. However worthy the benefit programs may be, they mainly support current consumption, which is fundamentally different from spending on investments or in response to war or crisis. Such consumption holds no prospect of enlarging the future but instead borrows from the future. Entitlements have become a politically irresistible force for tax-exempt spending growth.
James Buchanan was right to worry about the morality of deficit spending. President Coolidge viewed budget balancing as a moral responsibility. He said, “I regard a good budget as among the noblest monuments of virtue.” When he said this, he was not thinking of the moral conundrum of leaving debts to our grandchildren—he was concerned with the means for achieving virtuous results in the here and now.
Budgeting obliges one to make choices among the long list of projects always competing for resources. It provides a politic way of saying no to colleagues’ brainstorms that are dubious on the merits. It ferrets out waste and corruption. It limits the chances that well-intentioned interventions will, in Coolidge’s words, “do more harm than good.”
Today, routine borrowing has disabled all these practices. Indeed, political advocacy now often proceeds as if worthy government initiatives are thereby cost-free. Independent researchers have projected the Inflation Reduction Act to cost anywhere from $800 billion to $1.2 trillion, but champions of that legislation talk about it as if it has no costs at all, only benefits. Advocates of multibillion-dollar support for Ukraine say much the same thing—because, don’t you see, we are not sending money to Ukraine, only weapons and materiel made in the USA, which provides jobs for American workers and revenues for American businesses.
This sort of argumentation denies a central truth of economics, that of opportunity cost: Every human action necessarily means not doing something else. A return to the balanced budget norm would, among other virtuous things, bring us back face-to-face with the reality of human choice.
Christopher DeMuth is a Distinguished Fellow at the Heritage Foundation and a trustee of the Coolidge Fund.