Explaining U.S. federal deficits: 1889-1998

Economic Inquiry, July, 2002 by Brian L. Goff, Robert D. Tollison

Institutional Theories

Various "institutional" explanations for deficits have received prominent attention, and this term covers a wide range of political factors--processes, laws, parties and coalitions, and the like. These analyses have ranged from purely descriptive/historical treatments to rigorous maximizing models of political choice. (5)

The political science literature in particular has devoted considerable attention to the importance of federal budgetary processes and deficit policy. Schick (1995) provides a comprehensive overview of changes in budgetary processes and the literature surrounding their effects. [6] Using state-level data, Porterba (1994) showed that deficit carryover rules and tax/expenditure limits have effects on how rapidly fiscal authorities adjust to deficits. At the federal level, although many statutory changes related to budgets have received attention--for example, the 1921 Budget Act, the 1946 Legislative Reorganization Act, and the 1985 Gramm-Rudman-Hollings Act--existing studies have focused most heavily the Budget Act of 1974 (Congressional Budget and Impoundment Control Act). The latter not only reorganized the committee process by which Congress appropriates monies but supposedly reasserted congressional power relative to the president in control over budgetary matters.

Political parties are another institution-based avenue through which deficit financing decisions may be altered. Parties provide deal-making processes and enforcement mechanisms so that when a single party controls all fiscal decisions, different policies may ensue than when cross-party deals must be struck. The influence of parties on deficits has been explored in Roubini and Sachs (1989) and Alt and Lowry (1994).

Variation in the use of deficit financing may also occur due to the differential emphasis placed on tax or spending policy from one presidential administration to the next. If a particular administration is committed to lower taxes as a primary goal, regardless of the short-term consequences for deficits or possibly as a strategy to force politicians into reducing the growth of spending, then deficits may increase more during that administration than in one where other objectives take precedence.

III. EMPIRICAL MODEL AND MEASUREMENT ISSUES

Dependent Variable

Among the many empirical methodologies present in the literature, incomparability often arises due to the use of different deficit series. We use changes in the natural log of real primary federal government debt outstanding, which yields percentage changes in real primary debt (Debt/P, hereafter). (7) Figure 1 shows the behavior of both the level and percentage changes in Debt/P over the period 1890-1998. Percentage changes in Debt/P are stationary and translate nicely to the theoretical literature where the results pertain to primary deficits (deficits net of government interest payments). (8) Also, Debt/P has the advantage of allowing for an explicit consideration of increases and decreases in the real level of federal indebtedness. If primary indebtedness in real terms increases, this measure will be positive.