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National Debt and Deficit.

April 27, 2016

In the national and candidates debates during this election year, as in all other presidential years, the words “debt” and “deficit” are thrown about in order to justify one’s political position or criticize an opponent’s. Actually, it is usually a smoke screen since historically (at least since WWII) both parties run similar annual budget deficits with Republican administrations since the election of Ronald Reagan running somewhat larger annual budget deficits and both parties showing a somewhat similar growth in the National Debt as a percentage of GDP. The difference between the parties often comes down to what that Budget Deficit goes to pay for. Traditionally, for Republicans generally, it goes to pay for enhanced military development and tax relief for private capital expenditure and formation and higher income individuals with Democrats leaning more toward paying for social programs, public works, and tax relief for consumers and lower income workers.

Recently, I came across some information from the US Treasury Department on the annual US budget deficit, the total National Debt by year, US GDP and US National Debt as a percentage of GDP going back to at least 1929. I was able to cull the following from those spreadsheets.

First some definitions: The Budget Deficit is those government expenditures (including payments on the National Debt) not covered by revenues in a given year. For the most part from a policy standpoint, the annual deficit for any single year tends to be not all that significant except during times of great stress like wars and economic panic. The National Debt is what the Federal Government owes at any given time.

Let’s look at two lists I prepared from US Treasury spreadsheets going back to the end of WWII that I hope will shed a little light on the nature of the political rhetoric.

Percentage increase in total National Government debt by President during his term.

Reagan 186%
Bush 2 101%
Bush 1 54% (4 years)
Obama 53% (7 years)
Ford 47% (3 years)
Carter 43% (4 years)
Nixon 34% (5 years)
Clinton 32%
Johnson 13% (5 Years)
Kennedy 8% (3 years)
Eisenhower 9%
Truman 3% (7 years)

 

National Debt as a percentage of the Nation’s Gross Domestic Product at a President’s final budget.

Obama 106.7% (7 years)
Bush 2 85%
Truman 69.7% (7 years)
Bush 1 60.5% (4 years)
Eisenhower 51.3%
Clinton 56.2%
Reagan 51.4%
49.5% Kennedy (3 years)
35.9% Johnson (5 years)
Nixon 32.6 (5 Years)
Ford 31. 4% (3 years)
Carter 31.3% (4 years)

 
The second list is probably more important and informative since it relates the National Debt to the size of the economy at the time. While Bush 2 and Obama appear to have the larger percentage, a significant portion of those increases came at the end of the Bush administration and the beginning of Obama’s as they struggled to deal with the Great Recession ($1.1 trillion DEFICIT for the last year of Bush2 and $1.5 trillion DEFICIT for the first year of Obama). It demonstrates how great an economic crisis it was. (A similar spike would appear if these charts continued back to the great depression. Under Roosevelt, the depression and WWII increased the National Debt well over 1000%.) One takeaway is that after WWII, the size of the National Debt as a percentage of GDP decreased through all administrations Republican and Democrat alike until Reagan took office. Since then it has steadily increased except during the Clinton years. The most significant impacts on both Annual Deficits and the National Debt since Reagan took office has been a large reduction in taxes on upper-income individuals, non-earned income, and corporations, funding of the Iraq/Afghanistan wars and the Obama stimulus.

Another way of looking at this, and perhaps even more illuminating, is how many percentage points over his predecessor a President increased the National Debt as a percentage of GDP when he left office:

Bush2 28.8
Obama 21.7
Reagan 20.1
Bush1 9.1
Carter -.1
Ford -1.2
Kennedy -1.8
Nixon -3.3
Johnson -13.6
Eisenhower -18.4
Clinton -13.5

 
The above clearly shows Clinton and Reagan as outliers. The difference between them appears to be almost exclusively their approach to taxes on higher earners and corporations. The list also further demonstrates the massive distortion of governmental finances engendered by the Middle Eastern wars and the Great Recession.

I believe that a national economy works better and the growth of National Debt moderated when a significant portion of public expenditure works its way through the economy from the bottom (like fuel in a furnace) rather than from the top. How that is done should be the basis of public debate (welfare, public works, incentives to work or to hire people, or consumer tax relief and so on).

I have no idea of the ideal size of National Debt a mature nation should carry but suspect it depends on the interest rate on the debt and the ability of the nation to service the debt during times of crisis. That is why I believe Keynes prescription to run budget deficits during times of crisis and surpluses during periods of growth is sound politics and prudent fiscal policy.

Note: It should be pointed out that total US debt as a percentage of GDP from all sectors went from approximately 1.5 times GDP in 1946 to a little less than 4 times GDP today. In 1946, the total US debt-to-GDP ratio was 150%, with two-thirds of that held by the federal government. Since 1946, the federal government’s share of total US debt-to-GDP ratio has fallen from about 2/3 to a little over 1/4. On the other, hand the share of total US Debt as a percentage of GDP of the financial sector, has increased substantially from less than 1% in 1926 to about 28% in 2009 with much of that growth occurring in the private Non-Government backed securities area. Government backed debt part of the financial sector, such as Ginnie Mae etc., has remained a relatively stable while private financial debt has soared from 0% to about 12% of the total US debt as a percentage of GDP. The ratio for households has risen nearly as much, from 10% of total debt as a percentage of GDP to about 24%.

In other words, while federal debt as a portion of the nation’s economy generally has been falling, private debt has been growing substantially.
IMG_0924

So, what does all this mean? Damned if I know. I do know, however, that those who tells us they do know, usually don’t, and if they do, what they tell us is often a lie.

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