Saturday, April 2, 2016

Three Myths of the 2016 GOP Presidential Debates

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.

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.

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.

It was lack of regulation that produced the financial crisis of 2008, created massive unemployment and undermined the economy. The US is already one of the least regulated economies in the world. Over the last decade, the World Bank has ranked the US no lower than seventh and as high as third on ease of doing business. The rankings are based on the amount of required government procedures, and on the types of regulations on employment standards and production practices. Singapore, Hong Kong and recently South Korea are the principle competitors for greater ease of doing business. In contrast, 31st (out of 34 market democracies) is the average rank of the countries with whom the US is most comparable in worker safety, economic security and environmental standards.