Published in the Tampa Bay Times, Saturday, April 2, 2016.
Debunking U. S. Debt Myths
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.
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.