Published in the Tampa Bay
Times, Saturday, April 2, 2016.
Debunking U. S. Debt Myths
Edward Renner
The federal debt is too big compared with the size of the
U.S. economy, and it’s getting worse. But there is a mythology surrounding the
“why,” and it’s important to debunk it point by point to understand the real
reason — that we’re going deeper and deeper into debt because we won’t tax
ourselves to pay for the government we want, instead running up the debt year
after year until it is actually larger than the entire economy. (This chart
shows the debt as a percentage of the Gross Domestic Product — that is, as a
percentage of the U.S. economy as well as federal revenue and spending.) Let’s
dismiss three myths, one by one.
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Source: Federal Reserve Bank of St. Louis, U. S. Office of
Management and Budget
Notes:
The annual budget deficit is the amount each year that federal spending exceeds
federal revenue. This annual difference has been added to the cumulative
federal debt each year from 1981 to 2016, plus the interest due on the borrowed
money. These annual deficits account for the rapid growth of the federal debt
over the last 35 years. A high level of debt is very dangerous in the absence
of economic growth. The debt, combined with its carrying charges, goes up
really fast when not covered by growth in the GDP — such as was the case during
the Great Recession — even if revenue and spending remain constant, requiring
more of the spending to be directed to debt carrying charges, leaving less for
government programs. And when the debt exceeds 100 percent of the GDP, an
accelerating downward spiral can spin out of control, hurting the economy,
killing jobs and cutting the GDP, thus intensifying the problem by increasing
the amount by which the debt exceeds the capacity to pay. This is what happened
to Greece.
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Myth No. 1.
The Federal Government has grown too big and too expensive.
The size of the Federal
Government, measured relative to the US economy, has remained constant at about
20% of the Gross Domestic Product (GDP) since the Reagan administration in
1981. The factors associated with an increase in the GDP over these years – a
population growth of 90 million people, economic globalization, new
technologies and digital communication – are also associated with an increase
in Federal Spending – a modern army, roads, airports, higher levels of
education, international agreements, and structures for world travel, trade,
finance and mass communication. Failure to have kept pace with changing times
would have been a failure in the roles and responsibilities of government
itself.
Myth No. 2.
Taxes cuts will be good for the economy and create jobs.
Prior to 1981, taxes were
always increased to pay for government expenses. To cover the cost of World War
II and to reduce the nation’s war debt, the marginal tax rate was over 90% on
income above $400,000 from 1951 through 1963, a period of working class
prosperity. At the start of the Reagan period, the national debt had been
reduced to its previous highs of around 30% of GDP after the Civil War and WWI.
The tax cuts of the Reagan period did not stimulate economic growth to replace
the loss of tax revenue as promised. Instead, the tax cuts resulted in spending
exceeding revenue each year, thus creating annual budget deficits that increased
the cumulative national debt – year by year -- to over 60% of the GDP. The end
of the cold war (1991) eventually provided a peace dividend in which revenue
exceeded expenses, creating an annual surplus that allowed the total national
debt to be reduced to less than 60% of GDP by the year 2000. However, rather than
continue to use this annual budget surplus to reduce the national debt, additional
tax cuts under President George W. Bush, combined with the added expense of the
war on terror, increased the national debt to over 80% of the GDP. Then, the
financial crises of 2008 further reduced government revenue and required an
economic stimulus package that increased the national debit to over 100% of GDP
under President Barack Obama.
Myth No. 3.
Government regulations are hurting business, killing jobs and are bad for the
economy.
