In fiscal year 2024 the United States will produce a $1.9 trillion federal deficit, an issue that continues to stir debate among economists and policymakers alike. According to economic analyst Nancy Lazar of Piper Sandler, this deficit is primarily driven by entitlement programs and interest payments, which are now significantly wider than trend and are having ripple effects across the economy. The growing gap between federal spending and revenue is not just a matter of fiscal policy but is having a profound impact on the nation’s long-term growth, private investment, and living standards.
The Deficit and Its Causes
One of the major concerns raised in Lazar’s analysis is how deficit spending, particularly on entitlements, is crowding out private investment. Entitlements like Social Security, Medicare, and Medicaid, combined with interest payments on existing debt, are making up a substantial portion of the federal budget. This limits the availability of funds for other critical investments, especially capital expenditures (capex) by private businesses.
In the economic framework, this concept of “crowding out” refers to the government’s borrowing needs diverting resources away from private sector investments. When the government borrows more to finance its deficit, it competes with private entities for available capital, driving up interest rates and making it more expensive for businesses to borrow and invest in growth opportunities. This, in turn, places pressure on productivity, potential GDP, and ultimately, living standards.
The Real and Measurable Effects of Capex Crowding Out
Lazar emphasizes that the impact of this crowding out is both real and measurable. Capital expenditure is a critical driver of economic growth, as it contributes to the expansion of productive capacity, technological advancements, and labor productivity. When capital is diverted to cover government deficits rather than being used for private investments in factories, equipment, and innovation, it puts the brakes on the economy’s future potential.
The long-term consequences of reduced capex can be far-reaching. As productivity growth slows down, the economy’s potential to generate higher wages and improve living standards diminishes. This is a key concern for many economists, as declining productivity growth has been a persistent problem in the U.S. over the past few decades.
The Politics of Deficit Spending
In an election year, fiscal policy often takes center stage. Lazar draws a parallel to James Carville’s famous quip during the 1992 presidential election, “it’s the economy, stupid”, suggesting that the real issue is not the deficit itself but the federal government’s outlays. She argues that mandatory spending, which includes entitlements and interest payments, has been steadily rising as a percentage of GDP, while government receipts, primarily tax revenue, have remained relatively stagnant.
This mismatch creates a cycle in which rising outlays and growing deficits continue to exert pressure on private investment and the broader economy. Ironically, as the economy slows and living standards stagnate, there is often political pressure for even more government spending to alleviate the immediate economic pain, further exacerbating the long-term problems.
Headwinds to Growth and Living Standards
Analysts warn that unless structural reforms are made to curb rising entitlement spending and address the growing debt burden, the U.S. economy will face increasing headwinds to growth and employment. As borrowing continues and the crowding out of private investment intensifies, the potential GDP, and by extension, the living standards of future generations, will be increasingly constrained.
In conclusion, the $1.9 trillion deficit is not just a fiscal number, but a reflection of deeper, structural challenges within the U.S. economy. As government outlays continue to rise and crowd out private investment, the long-term growth potential of the economy is being undermined, threatening both future prosperity and economic stability.