On the other hand, the nation’s debt, while a big number, is actually not nearly as problematic as some would have it. There has been a lot of big talk about whether we have a spending or a revenue problem in this country – in my view what we have had is an economic problem.
If we look at the US public debt as a percentage of Gross Domestic Product, we see that last year we reached a postwar high. What has happened is the revenue has bottomed out as spending has spiked, but the GDP fell sharply early in the recession and has not returned to more typical growth levels.
Over the last fifty years, spending has averaged 20.6 percent of the GDP, while revenues have averaged 17.9 percent of the GDP. Right now the spending is high, about 23.3% ,while the revenue is slightly higher than when it bottomed out in 2009 – but it is still at 16.1%, or a low figure for the past 50 years. In fact, if you take out the bottom of the recession, it is still at the lowest point from 1960 to 2008.
So, while some have suggested we have a spending problem, we actually have the combination of both.
What has happened, as New York Times analyst Binyamin Appelbaum explained, is that as the recession eroded revenues, the government attempted to restore the economy through spending on the stimulus and other safety net measures. As a result, what was about a $455 billion deficit in 2008 surged to $1.4 trillion.
It is easy to pin this on presidential policies, as the debt has grown by about $6 trillion since 2009 from $10.5 trillion to $16.4 trillion.
However, it is less clear how much of that is due to the President. Last year, Ezra Klein of the Washington Post concluded that just $983 billion of the debt was due to legislation signed by President Obama.
His chart shows that a good deal is due to the economy and policies implemented by President Bush.
The question of blame is a political question; the more important question is whether we should be overly concerned with these numbers.
As I pointed out earlier this week, I have a difficult time taking seriously the alarm raised by Republicans. There have been two times when Republicans have expressed concern over the debt, not during the Reagan era when the debt increased considerably and not during the George W. Bush era, but during the two Democratic administrations.
A Congressional Research Service report argued that, while the debt-to-GDP ratio cannot continue to rise indefinitely, “it can rise for a time.”
They write: “It is hard to predict at what point bond holders would deem it to be unsustainable. A few other advanced economies have debt-to-GDP ratios higher than that of the United States. Some of those countries in Europe have recently seen their financing costs rise to the point that they are unable to finance their deficits solely through private markets. But Japan has the highest debt-to-GDP ratio of any advanced economy, and it has continued to be able to finance its debt at extremely low costs.”
The Republicans clearly see the debt discussion as a way to cut entitlement and other government spending. When they failed to get leverage rhetorically, they attempted first the fiscal cliff crisis, which ultimately failed to gain any spending cuts and they will attempt the same for the debt ceiling, but that does not appear likely to work either.
As Newt Gingrich, who himself attempted leverage by shutting down the government to his own political peril, said this week, “Everybody’s now talking about, ‘Oh, here comes the debt ceiling.’ I think that’s, frankly, a dead loser. Because in the end, you know it’s gonna happen. The whole national financial system is going to come in to Washington and on television, and say: ‘Oh my God, this will be a gigantic heart attack, the entire economy of the world will collapse. You guys will be held responsible.’ And they’ll cave.”
“He can’t keep thinking the way he’s thought the last few months without having a disaster on his hands,” said Mr. Gingrich of House Speaker John Boehner.
Not only does attempting to use the nation’s credit to leverage spending cuts create a political problem, it also creates an economic problem.
Given the nation’s perilous economy and fragile recovery, cutting spending to pay off the debt is not a very logical move. It would potentially take money out of the economy and harm the economy.
As Mr. Appelbaum explained, “Borrowing can be very good policy. It allows the government to provide Americans with a higher quality of life: more infrastructure, more services, more investment in the future.”
“And as long as the economy continues to grow, the loans actually become easier to repay with time because doing so requires a smaller share of current revenue,” he continued.
There are actually relatively painless ways to deal with this problem. It is what the nation did in the late 1990s. At that time, Congress and President Clinton slowed the growth in spending in critical areas and the robust economic growth led the nation to its first surplus since the 1950s.
So, if you are concerned with the debt, and I’m still not convinced you should be, the best policy advice is to allow the economy to fully recover, produce large GDP increases and then slow down government spending.
Allowing the nation’s economy to grow plus allowing inflation to slowly reduce the magnitude of the debt seems like a more realistic and viable option, rather than creating phony crises to force the hand.
As Mr. Appelbaum notes, “Consider what happened after World War II. In 1946, the federal debt equaled 122 percent of the nation’s annual economic output, the highest level on record. And over the next three decades, the amount the government owed almost exactly doubled.”
However, though the government ran deficits in the post-war years, “economic output, and inflation, rose even faster. By 1975, the federal debt was twice as large, but it equaled just 35 percent of the nation’s gross domestic product.”
He compares it also to a person buying a house. In simplistic terms, say a person makes $10,000 and buys a house with a mortgage that requires annual payments of $2,000.
“Over the following decade, the person gets a few raises and a new job. Add in some inflation, and the worker is now making $20,000. The mortgage debt, however, does not increase. The person still owes just $2,000 a year,” he writes.
If the Republicans wish to cut entitlement spending, they can have that discussion. But holding the nation’s credit and possibly the world’s economy hostage does not make sense.
—David M. Greenwald reporting