First-time readers, the dialogue in this blog is set in the future (sometime after the year 2020).  Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution.  More about Revenge Revolution and author, Entry #1.  List and general description of entries to date.  Annual assessment if Revolution plausible.

Note: most characters appear in a number of entries, with many entries building on previous conversations.  Profile of characters.  You’ll catch on quickly.  Thanks for your time and interest…and comments.

Scene: Gelly, Jordan’s assistant, has been editing and updating a primer Jordan wrote about 2011.  Section starts Entry #235(Primer will be available as PDF in more traditional format after the first few entries.  The download will be updated regularly.) 

092615_2031_Characters7.gifGelly:  “Jordan, can you clarify something for me, please?  Is the Federal debt too high?”

Jordan: “Interesting question.  Why do you ask?”

Gelly: “Some people I know and some of the talk-radio bloviators keep saying…or at least they used to say when Obama was president…that the Federal government’s debt is too high.”

Jordan: “Then let me guess.  The follow-on comment, ‘The country needs to return to the fiscal-conservative days of the Reagan Administration.'”

parrothead_tnsGelly: “Exactly right.”

Jordan: “I find it interesting the claim about Reagan as a fiscal conservative…but what are the facts?  Here’s the question: ‘Since the 1960’s, under which president has the Federal debt as a percent of GDP (gross domestic product) increased the most?  (Note: In the early decades following WWII, Federal debt as a percent of GDP declined sharply.)

Gelly: “First, just what is the Federal debt?”

TurtleneckJordan: “Grab a cup of coffee and I’ll walk you through some of the basics.”

Gelly: “Good.  That should help me understand the rest of the primer.”

Jordan: “For non-economists, the Federal debt is essentially what you think it is…the amount of money the US government owes creditors. The Federal debt is similar in many ways to the debt you owe – mortgage on the house, outstanding car loan, student loan and credit cards.

One major difference. The US government can print money to pay-off its debt; you cannot print money…at least legally.

Is the Federal debt too high? Depends.

CashTo help answer whether Federal debt is too high, first let’s start by roughly adding up all your debt – mortgage on the house, loan on the car(s), outstanding balance on credit cards, etc. Let’s say your debt totals $250,000. If your income is $50,000 per year, your debt of $250,000 is too high. If you make $100,000 per year, your debt is reasonable. If you make $250,000 or more per year, you’re probably in very good shape.

So how do the examples of personal debt compare to the debt of the Federal government? Surprisingly, personal debt is generally higher, often 2-3 times more than household annual income. When you bought your first house, for example, how much higher was your mortgage (with interest) than your annual income?

If you were comfortable getting that big a loan for your house, then relax about the Federal debt.  The Federal debt is much lower proportionately than your personal debt.

Was Reagan a Fiscal Conservative?

The chart indicates debt as a percent of GDP from the 1960’s through early 2017. Most people who view the chart are surprised to learn that debt did not decline under Reagan/Bush.  In fact, under Reagan/Bush 41 debt as a percent of GDP just about doubled — from about 30% of GDP to almost 60% of GDP.  Based on the metrics used by many Republican to claim debt under the Obama Administration was “out of control,” Reagan should have been branded as a president leading the country toward bankruptcy.

17-02-12-gdp-growth-1950-2016

Republicans who brand Democrats as “tax-and-spend” need to be reminded that under the Clinton Administration that followed Reagan/Bush 41, the Federal government ran a surplus and total debt as a percent of GDP declined.  Yes, I understand the sarcasm in what’s supposed to be an apolitical primer.  However, without some prodding and poking, the “alternative facts” crowd will continue to make erroneous claims that Reagan was a fiscal conservative.

Federal debt as a percent of GDP climbed sharply under Bush 43 (2001-2009) Administration from about 55% of GDP to about 80% of GDP.  The primary causes were implementing a major tax cut, which decreased Federal revenues at the same time increasing spending for wars in Iraq and Afghanistan.

Under Obama, Federal debt as a percent of GDP increased sharply at the beginning.  The cause was primarily efforts to overcome a severe recession.  During the recession, which started toward the end of Bush 43, Federal government tax revenues fell sharply and Federal government spending increased sharply to help stimulate the economy.  In the latter years of the Obama Administration, annual Federal deficit declined as did the rate of increase Federal debt as a percent of GDP.

(For those thinking the government should cut back on spending in recessions, there will be a separate entry to explain why, in a recession, fiscal actions for the Federal government and individual households should be exactly the opposite.)  

Under the Trump Administration, debt as a percent of GDP is likely to increase. Trump voodoo-2015958and Republicans are pushing for a major tax cut, similar in many respects to the “trickle-down” tax cuts by Reagan and Bush 43.  “Trickle-down” economics is what Bush 41 famously labeled as “voodoo economics” in the campaign against Reagan.

In addition, Trump Administration has proposed a major infrastructure rebuilding program.  An equally ambitious infrastructure rebuilding program proposed under the Obama Administration was deemed “too expensive” by Republicans.  Apparently, the cost of such a program and the dramatic increase to the Federal deficit are no longer issues.  Mmm, wonder what changed the Republicans thinking?

Trump claims the additional expenses associated with government spending will be offset by additional revenues from accelerated economic growth.  Annual growth in GDP will somehow magically increase to an average 4.0%.  While 4.0% growth in GDP has been achieved periodically since WWII, such a high rate has not been sustained.  Further, the rate is often the result of the stimulus associated with large fiscal deficits.

17-02-12-gdp-growth-1950-2016

Given all the “don’t worry about the deficit because it will magically disappear” rhetoric now that Trump is in the White House, the next time a Republican claims policies of Democrats have crippled the country with debt, note that Reagan and Bush 43 administrations increased debt far more than any other administration since WWII…and Trump is likely to set another record for increasing the debt.  So much for being a “fiscal conservative.”

OK, What Really Caused the Debt to Increase?

  1. Republican-led tax cuts that did not translate into sustained economic growth, thereby creating more debt.
  2. Allowing taxes for Social Security and Medicare to be counted as “general revenues” and effectively used for other purposes. Such “baloney” accounting has allowed both parties in Congress to justify not raising taxes to pay for other programs.
  3. Belief by most Republicans that tax cuts for the wealthy will “trickle down” to middle and lower incomes.  There is no credible evidence to support such claims.
  4. Allowing, and even encouraging companies to relocate manufacturing outside the US, thereby reducing wealth creation and ability to collect tax on payroll and income.

Proposed Simple Changes to Policy.  Following are some simple changes to government policy that would have an immediate and positive impact on US economic growth. Some of these have been proposed previously and some are under consideration by the Trump Administration.  Serious consideration should be given to:

  1. Stop counting tax revenues for Social Security and Medicare as “general revenue.” It is OK to run a Federal deficit. Just make certain the amount of the deficit is understood and not understated by phony-baloney accounting.
  2. Recognizing that people who are unemployed do not need lower taxes.  Unemployed people likely pay no income taxes. Unemployed people need cash.
  3. Recognizing that people who are unemployed/under-employed spend a higher percentage of income than those employed, especially those with higher incomes
  4. Recognizing that people who work have more self-esteem than those who take handouts. Put the unemployed to work, even if the task is ”beneath their skill level.” There are many worthwhile projects that need to be completed.  If you don’t like this idea, then read some accounts of how government programs during the 1930’s New Deal programs positively affected lives of all income strata.  And check your own family history to see who benefitted.”

Gelly: “Thanks for the summary Jordan.  Seems to me for the president and Congressional leaders, maybe the most important guide about proposing changes to government economic policy is use some common sense.  Think before you act…or react to an idea. Thinking before you act was good advice from our parents when we were teenagers. Still relevant today.”

 

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