I have said a couple of things about the size of our deficit and also responsibility and taxation. I have not said anything about what might be called 'deficit policy'.
There are a couple of concise, simple summaries of US debt. One is on Wikipedia, which has nice graphs. Another is, of all things, a Youtube video that puts the debt in a graphical analogy. Another source for debt discussion comes from economics texts, in this case a book I borrowed from my sister's husband.
The US debt fluctuated between 0 and about 30% of GDP until 1980, except for the spike of WW2 spending, when total debt briefly hit 101% of GDP. By 1960 it was 56% of GDP and 1970 37% of GDP. In 1980 it was only 33% of GDP, but by 1990 it was 56%. There is a slow creep to 65% by 2006, but then things really take off. In 2008, 70%, 2009, 86%, 2010, 98%, 2011, 101%. During the Great Depression, that terrible period that relied on governmental spending, the deficit went from 5 to 40% of GDP. Remember that all these numbers are normalized to the GDP value of their times. There is no inflationary effect here. The 35% increase in debt required to 'cure' a depression is the same proportion as has been added from 1980 to 2006, and also equal to that added from 2006 to 2011 alone.
One may argue that this current 'recession' is an economic crisis of near-equal magnitude to the Great Depression. At this time, the clear answer is it is not. It may become so yet. In the Great Depression, stocks in 1930 had recovered the great bulk of the value they lost in 1929, and unemployment had also declined going into 1931. The failure of German war debt repayment led to a collapse of a French bank, and in turn a run on banks who had financed the German war debt. The problem was similar to the 'toxic mortgage assets' today- no bank that held German bonds could count on their being paid. The wave of bank failures limited lending, followed by a wave of business and stock collapses, with unemployment reaching 25%, and the election of FDR the following year. But I digress. I only wanted to point out that the federal money spent to rescue banks was not a bailout of Wall Street but a sensible move to avoid disaster, based in situational similarity, which has apparently been avoided. This right action has nothing to do with steady accumulation of debt.
Keynes wrote his economic theories based on the Great Depression. He wrote in opposition to a monetary theory that held governmental spending could not influence a notional economy, and should not be used in that way. He argued, in essence, that in unusual conditions governmental deficit spending was permissable and helpful. While that appears true, he certainly did not argue for deficit spending as a habitual way of funding government.
A final point about deficits. Deficits financed by a government's own holdings, or its citizen's own holdings is considered internal debt. The interest on it counts toward GDP, as it is money paid to citizens. Debt held by other governments is external debt, and interest counts against GDP. This is simply illustrated. Imagine buying a 30,000.00 car with a home equity loan. That loan counts against your net worth, and you pay interest to the bank. If you take 30,000.00 out of savings, paying it back to your own savings account with interest, you have lost nothing in net worth.
The US has had a stable portion of its debt held by foreigners for some time. It has varied between 18 and 23% of all debt for 25 years. beginning in 2003, it has now increased to 28%. This is why both China and the US are nervous about external debt- it is not economically healthy.
Now, my point. We as a nation can not continue to run deficits as a way of funding social programs. It is simply economic suicide, over time. For some reason, humans have a very hard time planning for or even envisioning future events beyond a couple of years as most. We are now at a historical high in cumulative debt, a high which was previously worked off in 20 years by careful budgeting (also by tax reduction under Kennedy, but I've made that point before). Think we're going to work off this debt in 20 years? We continue to run budget deficits in the hundreds of billions and trillions of dollars. This is about the same way to work off debt as eating McDonald's three times a day is a way to lose weight.
What waits at the end of this process is governmental default, inflation and international economic threat. Inflation is a great way to reduce the value of debt. If inflation reaches 10% yearly, total debt value has been reduced by that same amount, of course at the expense of reducing everyone's invested money.
We must have the financial discipline now to stop spending, and make realistic statements about what government can do, and what taxes it requires, until we clear our terrible debt. Everyone wants someone else, or 'the government', to be responsible for problems and needs. That feels easy and safe. It's not, any more than eating out solves the problem of cooking and weight control. Easy in the short run, devastating in the long term.
Ted
There are a couple of concise, simple summaries of US debt. One is on Wikipedia, which has nice graphs. Another is, of all things, a Youtube video that puts the debt in a graphical analogy. Another source for debt discussion comes from economics texts, in this case a book I borrowed from my sister's husband.
The US debt fluctuated between 0 and about 30% of GDP until 1980, except for the spike of WW2 spending, when total debt briefly hit 101% of GDP. By 1960 it was 56% of GDP and 1970 37% of GDP. In 1980 it was only 33% of GDP, but by 1990 it was 56%. There is a slow creep to 65% by 2006, but then things really take off. In 2008, 70%, 2009, 86%, 2010, 98%, 2011, 101%. During the Great Depression, that terrible period that relied on governmental spending, the deficit went from 5 to 40% of GDP. Remember that all these numbers are normalized to the GDP value of their times. There is no inflationary effect here. The 35% increase in debt required to 'cure' a depression is the same proportion as has been added from 1980 to 2006, and also equal to that added from 2006 to 2011 alone.
One may argue that this current 'recession' is an economic crisis of near-equal magnitude to the Great Depression. At this time, the clear answer is it is not. It may become so yet. In the Great Depression, stocks in 1930 had recovered the great bulk of the value they lost in 1929, and unemployment had also declined going into 1931. The failure of German war debt repayment led to a collapse of a French bank, and in turn a run on banks who had financed the German war debt. The problem was similar to the 'toxic mortgage assets' today- no bank that held German bonds could count on their being paid. The wave of bank failures limited lending, followed by a wave of business and stock collapses, with unemployment reaching 25%, and the election of FDR the following year. But I digress. I only wanted to point out that the federal money spent to rescue banks was not a bailout of Wall Street but a sensible move to avoid disaster, based in situational similarity, which has apparently been avoided. This right action has nothing to do with steady accumulation of debt.
Keynes wrote his economic theories based on the Great Depression. He wrote in opposition to a monetary theory that held governmental spending could not influence a notional economy, and should not be used in that way. He argued, in essence, that in unusual conditions governmental deficit spending was permissable and helpful. While that appears true, he certainly did not argue for deficit spending as a habitual way of funding government.
A final point about deficits. Deficits financed by a government's own holdings, or its citizen's own holdings is considered internal debt. The interest on it counts toward GDP, as it is money paid to citizens. Debt held by other governments is external debt, and interest counts against GDP. This is simply illustrated. Imagine buying a 30,000.00 car with a home equity loan. That loan counts against your net worth, and you pay interest to the bank. If you take 30,000.00 out of savings, paying it back to your own savings account with interest, you have lost nothing in net worth.
The US has had a stable portion of its debt held by foreigners for some time. It has varied between 18 and 23% of all debt for 25 years. beginning in 2003, it has now increased to 28%. This is why both China and the US are nervous about external debt- it is not economically healthy.
Now, my point. We as a nation can not continue to run deficits as a way of funding social programs. It is simply economic suicide, over time. For some reason, humans have a very hard time planning for or even envisioning future events beyond a couple of years as most. We are now at a historical high in cumulative debt, a high which was previously worked off in 20 years by careful budgeting (also by tax reduction under Kennedy, but I've made that point before). Think we're going to work off this debt in 20 years? We continue to run budget deficits in the hundreds of billions and trillions of dollars. This is about the same way to work off debt as eating McDonald's three times a day is a way to lose weight.
What waits at the end of this process is governmental default, inflation and international economic threat. Inflation is a great way to reduce the value of debt. If inflation reaches 10% yearly, total debt value has been reduced by that same amount, of course at the expense of reducing everyone's invested money.
We must have the financial discipline now to stop spending, and make realistic statements about what government can do, and what taxes it requires, until we clear our terrible debt. Everyone wants someone else, or 'the government', to be responsible for problems and needs. That feels easy and safe. It's not, any more than eating out solves the problem of cooking and weight control. Easy in the short run, devastating in the long term.
Ted
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