Why Federal Spending Never Goes Back Down

Federal spending in 2019, in real 2023 dollars was about $5.7 trillion, and in 2020 it was about $7 trillion. Today, it's still around $6.7 trillion.

Notice what didn't happen?

It didn't come back down.

This is federal spending in America since 1970. And what you're looking at is more of a ratchet than a growth in spending that can come down in the future. Federal spending in America has one direction. Up. Like the cost of living, but with bigger numbers and bigger consequences.

The Ratchet Effect

A ratchet is a mechanism that allows movement in one direction but blocks it in the other. Federal spending behaves the same way. It can go up fast, but it almost never comes back down.

Watch the chart again. Each major spike lines up with a crisis.

• 1973-1975: Oil shock and recession

• 1980-1982: Volcker recession

• 1990-1991: Gulf War and recession

• 2001-2002: Dot-com crash and 9/11

• 2008-2009: The Financial Crisis

• 2020-2021: COVID

Between crises, spending grows steadily and During crises, it increases rapidly. Then the crisis ends, and the spending doesn't go back to where it was, instead it becomes the new floor. This is one of the most important features of modern American government and almost nobody campaigns on fixing it, because there's no political reward for trying. Rather they can pass on the debt to the next administration over and over again until it implodes. 

Why the ratchet only works one way

There are reasons spending goes up easily and never comes back down, and unlike what political commentary would have you believe, they're structural, not partisan. First, every dollar the government spends becomes someone's income. So when you cut a program, you are cutting someone's paycheck, someone's contract, and someone's hometown employer. So the incentive and pressure is always to keep spending, while the advocacy for cutting spending is more spread out and quieter.

Second, "temporary" programs become permanent. The mortgage interest deduction was created in 1913. It’s still here. Social Security was created during the Great Depression as part of an emergency response. It’s still here and bigger than ever. Once a program exists, dismantling it is much harder than creating it.

Third, and this one is more of an effect of the last two, crises increase the baseline spending. After 2008, the federal government took on emergency responsibilities like bank oversight, and expanded unemployment systems, and never gave them back. After 2020, the same thing happened with PPP, child tax credit expansion, and emergency healthcare programs. Even after the crisis ends, the spending stays.

Fourth, the government can borrow at a larger scale than any other entity, so when there's spending pressure, the easiest answer is always to add it to the deficit rather than cut something else.

The debt is the receipt

If federal spending is the action,then  the national debt is the receipt.

This is the total amount the U.S. government owes, in real 2023 dollars. In real dollars, the debt went from about $2.5 trillion in 1970 to about $33 trillion today. That's roughly a 13x increase, while the real economy grew about 4x in the same period. Debt has been growing more than three times faster than the economy that has to support it.

And the line isn't a clean straight diagonal. Steeper in the 1980s with Reagan's deficits compounding through the decade then flatter in the late 1990s when the Clinton surpluses actually slowed real debt growth for a few years. Then visible step-ups in 2008 and 2020 when crisis spending kicked in.

But the overall direction only goes one way. Budget surplus growth only slows during good times but It never reverses.

This is a different cut of the same story, showing nominal debt growth by decade. The 1980s win the trophy here too, but every decade since 1970 has averaged at least 2% annual growth in the debt, and most have been closer to 5%. Compounded over 50 years, that kind of steady growth produces the exponential trajectory you saw in the first chart.

The thing that should keep you up at night

The ratchet works on spending, and it also works on debt, but it doesn't work on revenue.

Tax revenue is cyclical, which means it goes up in good times and goes down in bad. Spending only goes up, which means the gap between them, what we call the deficit, gets structurally wider over time.

For most of American history, the federal government ran surpluses, meaning that they saved more than they spent, in peacetime and deficits during wars. The last sustained peacetime surplus was 1998 to 2001 under Clinton.  Today, even with unemployment near historic lows and a strong labor market, the federal government is running a deficit of nearly $2 trillion a year.

We're running a wartime-sized deficit during peace and prosperity. The system as currently configured does not produce surpluses anymore, not because politicians don't want them, but because the ratchet has bent the curve so far that even excellent economic conditions don't generate enough revenue to catch the spending floor.

What I take away from this

A few things.

Spending isn't fundamentally a Democratic or Republican problem. Look at the chart: Spending went up under Carter, under Reagan, under Bush, under Clinton, under Bush II, under Obama, under Trump, under Biden, and under Trump again. The ratchet doesn't care who's in office, so the trend is fully bipartisan.

Crises are expensive AND permanent. The next major recession won't just cost a few trillion in one-time emergency spending, It will also permanently reset what the government spends in normal years. This has happened every cycle since 1970 and there's no reason to expect the next one to break the pattern.

When we have exponential debt growth and GDP that is much slower growth, somewhere out there is a point where the GDP will not be able to handle that debt. We don't know when, but we do know that it gets closer every year. 

Next post: Why healthcare spending rises when the rest of the economy breaks.