Following up on this post, I ran down some more comprehensive stats on the public debt; it turns out OMB’s data stretches back to 1940.
Figure 1: Federal Debt as % of GDP, 1940-2008
Notes: “Intra-Gov” = sum of “Held by Federal Government Accounts” + “Federal Reserve System” columns in Table 7.1 of Obama’s 2010 budget. “Privately Held” = difference between “Intra-Gov” and the “Gross Federal Debt” column of table 7.1. Annual GDP data from BEA’s National Income & Product Accounts, Table 1.1.5. (Note that the definition of “Privately Held” debt for Figure 1 below differs somewhat from that used in this chart from my last post; my guess, based on the aforementioned OMB data, is that the Fed data included securities held by the Fed itself in its totals.)
The “Privately Held (Smart Bush)” line in Fig. 1 assumes that Bush II had copied Chile’s example and run up smaller deficits (and eventually surpluses) after the early ’00s recession ended, along the following lines:
Table 1
|
Year |
Surplus/Deficit |
Privately-Held Debt (% GDP) |
|
|
Nominal $ |
% of GDP |
||
|
2003 |
-80,000 |
-0.73% |
27.5% |
|
2004 |
160,375 |
1.37% |
24.4% |
|
2005 |
300,302 |
2.42% |
20.6% |
|
2006 |
395,352 |
3.00% |
16.4% |
|
2007 |
414,225 |
3.00% |
12.6% |
In Table 1, positive #’s denote a decrease in privately-held Treasury debt. By way of reference, the Clinton-era surpluses lowered outstanding privately-held debt by 1.4% of GDP in 1999, & 2.4% of GDP in 2000.
A few of points come to mind:
- Had Bush II followed the “Smart Bush” scenario mentioned above, the federal government would’ve entered the current economic downturn with a much stronger balance sheet, with privately-held debt at 12.6% of GDP instead of ~31%.
- In such a scenario, our flexibility in dealing with said downturn (and the associated financial crisis) would’ve been correspondingly greater. Ditto our breathing room – e.g., via multi-year fiscal stimulus – in the event that the downturn ended up being a prolonged one.
- Even under the “Smart Bush” scenario, Obama’s budget plans would’ve remained unaffordable. See Fig. 2 here. Although this scenario would’ve allowed Obama to accumulate debt from a lower starting point, the upward trajectory of said accumulation would’ve remained obvious.
On another note…Figure 2 plots nominal federal debt for 1940-1974:
Figure 2: Federal Debt in $bn, 1940-1974
This confirms something I’d long suspected: The reduction in debt/GDP ratio between 1948 & 1974 resulted not from a decrease in nominal debt levels, but rather from increased nominal GDP. We never paid off the debt from WWII. Instead, we refinanced it; added only modestly to it; and shrank the debt/GDP ratio via inflation & economic growth.
Totally-Unrelated Aside: I wasted way too much time here this morning. HT: The Baseline Scenario.
Good charting. I have learned from you. I had never looked at the raw numbers before, and heaven knows I remind other people to do so, and did not realize that our debt has not really decreased since WWII, just our GDP has grown. Your conclusions here are correct IMHO, with maybe one tiny caveat (later). I do not see any way we get out of this debt w/o some tax increases and some decrease in spending. If I were a betting man, I would predict cuts in foreign military bases, means testing for social Security and maybe even Medicare. I think we will see tax increases after the 2012 election.
What would have happened if McCain had been elected? The debt would be as big or bigger, but there would have been more tax cuts and less spending stimulus. I would still predict no actual spending cuts. To resolve the longer term deficits he would have done much the same as Obama, minus the military base closures and bigger cuts in Medicare/Social Security.
Caveat.- I am thinking we might have had less worries about inflation all along if we had started with a lower debt. Most of us, I think, have been more worried about deflation, but the inflation hawks have helped down the size of the stimulus. A lower initial debt would have allowed for, IMHO, a better test of Keynesian theory. On our trip to Canada, we got an audiobook of Niall Ferguson’s Ascent of Money (weird family we are). he has a nice section on bond markets, which do not always make sense to me. If I understand them correctly, I think lower debt would have left us stronger when it came time to issue new debt, especially as we would have been way ahead of other countries to which bond investors might have turned.
Also, curse you for the lolcats link. Now I wasted too much time. My grandfather could do the milking thing with the barn cats. That brought back memories.
Steve
Steve – I honestly don’t know how we’ll (eventually) close the deficit. While I’d find a combo of tax increases & spending cuts acceptable, I fear much of the electorate (particularly the ideological purists therein) will not, and that we won’t get serious about balancing the books ’till something like a dollar crash and/or rollover crisis forces us to.
Re. McCain – I suspect that, in the near term, we might’ve gotten a smaller fiscal stimulus (if any), comprising a larger proportion of tax cuts than OTL. As for the longer term…harder to say.
Re. inflation & debt – ceteris paribus, methinks lower debt means less inflation risk, since there’s less worry that non-Fedgov holders of Treasuries will choke on new borrowing (thus making monetization a sine qua non of deficit spending, jacking up inflation expectations, etc.).
Re. Ferguson – I liked his “Virtual History”, but haven’t read much else by him. ISTR him getting thrashed by Krugman a month or so back. AFAIK, Treasuries are already preferred vis-a-vis other sovereign bonds; however, given a sufficiently-high debt/GDP ratio, lenders will naturally become concerned re. default risk, rollover risk, etc. IMHO, the main advantage of a lower initial debt is that it would’ve left us with more percentage points of debt-GDP ratio to play with before lenders started to get worried.
As an interesting contract, I found this interesting representation of European economies.
MI, I think if you ever went on the O’Reilly Factor, you’d be the only person besides Stephen Colbert to win. (Same for any cable TV show, really.) That said, I’m still learning about all this stuff (or, perhaps, discovering the things that nobody else bothers to say in the echo chamber), and I’m grateful for these analyses.
I agree strongly that defense spending must be decreased. Unfortunately, the American voters are currently denied that option, since both parties allow annual increases in defense spending. It seems pretty clear that neither current defense levels nor our current policy of unilateral foreign activism is sustainable, given the apparently diminishing returns from this activism since, perhaps, the end of the colonial period; I therefore predict that we will either need to participate more credibly in the growing movements of international leagues (conceptually in the vein of EU, NATO, Mercosur, Arab League, etc.), or else decline in power, prestige, and wealth. I may write about this at some point.
WRT means testing Social Security, I don’t doubt that it could be raised at some point, but I can only reiterate my position (see my welfare posts) that means testing is counter-productive. Rather than prevent people from obtaining public benefits who shouldn’t have them, it forces people who need them, but who are marginally above the eligibility requirements, to exhaust their resources to obtain them. Consequently, they lose any ability they might once have had to get off public benefits, which increases the burden on the taxpayer.
wordadvocate –
WRT defense spending, the question of cutting (or increasing) is, to me, secondary to the question of grand strategy. On a very abstract level, methinks our goal should be the 1) preservation of American independence & sovereignty; & 2) the protection of our citizens’ lives & rights. A corollary to #1 is limiting the ability of foreign nations to dictate terms to us.
IMHO, none of these goals justify much (most?) of our current foreign entanglements. Given my druthers, I’d settle for a naval service able to deny the seas to any & all enemies; a somewhat smaller Army & Air Force; competent border security; and the ability to deter and/or intercept WMD’s aimed at US soil. Whether that sort of force would be cheaper than our current one, I’m not sure.
WRT means testing – I’ve heard it suggested that a “negative income tax” might help alleviate some of the disincentives you speak of, but I’m not well-read on the subject.
“a larger proportion of tax cuts than OTL”
What is “OTL”?, asks DSL., LOL.
OTL = “our timeline”; as opposed to “ATL”, referring to some alternate timeline.
Results of an on-and-off interest in the alternate history genre.
A few thoughts–
1) Heck, WW*I* debt isn’t paid off yet–Germany is still paying off her war reparations, at least into next year. I’m not kidding.
2) Taxes are going to go up, particularly on the wealthy. The public will accept this, and so will Congress. They know they have no choice. Of course, “going up” is kind of a relative term. Obama’s proposed a higher top bracket, and an intermediate bracket below that. But even leaving them alone means “higher taxes” over time due to inflation-driven bracket-shifting (as cost-of-living increases drive wages ever-higher). Actual *revenue* is of course way down right now, including income tax revenue *and* corporate income tax revenue. Economic recovery is the #1 solution to debt right now.
3) As I’ve pointed out to my friends, it’s obviously unfair not only to project “Obama’s deficits” out to 2019, but also hold him responsible for all of 2009. Most of 2009 is the result of 1) Bush’s last $450B or so deficit, 2) formerly non-budgetary spending, including Iraq/Afghanistan supplemental spending (it previously accumulated as debt, though did not appear in the deficit) that is now counted as an on-budget item (also borrowing from SocSec surpluses to feed payments goes onto the budget as revenue, but counts as debt on the back end) and 3) the bailout–which is different from the stimulus–all of which Bush was directly responsible for, whether rightly or wrongly. Very little of the current $1.85T deficit is directly due to Obama (“very little” in this case meaning “only a few hundred billion dollars”). And clearly if Obama can be responsible for 2018/19 deficits and debt, Bush can be responsible for 2010/11 deficits and debt. But this is misleading at best.
4) Let’s say Obama canceled all new discretionary spending next year. This would bring the deficit all the way down from…$1.2T to about $1.05T. The rest is caused by disastrous revenues, new mandatory spending (including mandatory welfare and unemployment insurance), continued borrowing from SocSec surplus to make current payments, and the roughly $200-300B deficit we would normally run anyway based on our post-2001 revenue-to-expenditure habits. The situation is that bad. If Obama returns to a $500B deficit in 2012, that might actually be an improvement over Bush’s last deficit (again, projected $450 in 2009, which turned out to be wildly off), due to inflation and to expenses that Obama now includes in the budget, but Bush left out. If Obama racks up $6.25T in new debt over eight years, that will just be keeping pace with Bush, accounting for an average inflation of about 3%. But because the benefit programs are growing faster than inflation, the debt will probably be much worse than that, without new taxes.
5) Economic growth will probably never catch up with Medicare/Medicaid and SocSec spending. Again, it’s that bad. Higher taxes and/or fusion power will be necessary–there is no way around it. The alternative is accepting that these programs are basically just another pension fund that has gone bad, and that when the money’s gone, the money’s gone. Personally I wonder if a law should be passed mandating that your parents must move in with you when they turn 70.
6) We still can’t count on anyone else to provide military forces worldwide. The US is in fact actively interested in a better EU treaty, as it would provide a unified military command that they currently lack. However, Europe still can’t get everyone on board (Ireland, Netherlands, Denmark, etc.) and we have to wait. I agree military spending is growing faster than we can afford, too. I hope for a speedy resolution in Afghanistan so we can bring them home as well. But I have my doubts.
7) So, in other words, we need to restart the economy, raise taxes, fix health care, figure out a plan for Social Security, and win in Afghanistan, all in the next eight years (maybe four) in order to solve our debt problems. Plus we can’t have any more surprises, or make any mistakes.
8) Depressed yet?