Debt ceiling deal shows both parties love debt

As you’ve probably heard, House Democrats have cut a two-year budget deal with Senate Republicans and President Donald Trump to suspend the federal debt ceiling and increase federal spending by $320 billion. The debt ceiling is an arbitrary and possibly counterproductive construct, while the spending increases aren’t all that big if you assume that inflation will continue at about 2 percent a year, and may not even represent increases in federal spending’s share of gross domestic product. Long-run concerns about the burgeoning federal debt left aside — since almost everybody seems to be leaving them aside these days — this seems like a reasonable enough deal.
It’s a big contrast, though, from what happened in budget negotiations during the six years of this economic cycle when Republicans ran the House of Representatives and a Democrat was in the White House. From 2011 through 2016 there were repeated threats of a debt default due to House Republican opposition to raising the debt ceiling, and budget sequestration that helped bring on a three percentage point decline in
federal spending’s share of GDP. Coupled with belt-tightening at the state and local level, this resulted in an impact on real GDP growth of negative 0.5 percentage points a year, according to the quarterly fiscal impact
calculations of the Brookings Institution’s Hutchins Center on Fiscal
and Monetary Policy.
Since Trump took office, fiscal policy has by contrast contributed an average of 0.3 percentage points a year to GDP growth. That represents a 0.8 percentage point shift. Meanwhile, the average real GDP growth rate has risen from 2.1 percent a year during those six years to 2.8 percentsince the beginning of 2017, a difference of 0.7 percentage points. Coincidence?
My numbers here are a little dodgy — because it’s all I could do with the available data, I simply averaged quarterly GDP growth and fiscal impact estimates rather than calculating compound annual growth rates — and government spending probably doesn’t translate quite that directly into economic growth. But with the president and his supporters claiming variously that tax reform, deregulation, and/or tougher trade policy has generated the acceleration in economic growth, it does seem like we ought to be giving more credit to the shift from relative austerity to fiscal easing on Capitol Hill. “It’s often overlooked,” economist Mike Madowitz of the left-leaning Center for American Progress declared on Twitter after the budget deal was announced, “but the biggest economic improvement since Trump took office is more government spending.”
Also noteworthy are the asymmetric politics of this shift. Economist Daniel Altman wrote a 2012 manifesto about House Republicans’ deficit hard-lining titled “Sabotage: How the Republican Party Crippled America’s Economic Recovery.” Since 2016, by that reasoning, the sabotage has stopped — and the economy has improved.

—Bloomberg