A Primer on the National Debt

Daniel Patrick Moynihan once famously quipped that everyone is entitled to their own opinion, but not their own facts. Moynihan’s head would explode in today’s world of alternate political realities that seek to explain the explosion of the national debt since the early 1980s.

I recently wrote an essay which was published in Texas Monthly [click here to read]which suggested that the recently passed tax bill would likely contribute to an increase to the national debt, which is already on an unsustainable course. There were several hundred on-line comments to the essay. Many of the comments were along the lines of “it is hypocritical for a Democrat to start complaining about the deficit now when Obama increased the debt by more than any other president/doubled the federal debt.”

Well, first, I am not a Democrat. When I ran for mayor in Houston in 2015, I described myself as a Republican-leaning independent. I have consistently voted in the Republican primary for the last 30 years and over 80% of my political contributions have gone to Republicans, a significantly higher percentage than our current Republican President.

Second, this is not the first time I have expressed my concern about the federal debt. While I was writing for the Houston Chronicle, I wrote on the subject many times and on each occasion laid the blame at the door of both parties.  (For example, see CBO Deficit Projections Suggests Two Realities published March 17, 2013.)

Third, just to set the record straight, the national debt rose while Obama was president from $10.6 trillion to $19.9 trillion, a $9.3 trillion or 87% increase. $1.2 trillion of the increase came in the budget that he inherited from the previous administration. It was certainly the largest single increase in the federal debt during any administration, but in inflation-adjusted dollars, it was about the same as during the Bush 43 administration and on a percentage basis Obama comes in a distance third behind Reagan and Bush 43.

If we are going to actually do something about the unsustainable trajectory of our country’s finances, we have to drop the mindless repetition of partisan talking points and take a hard, cold, dispassionate look at the facts about how we got here.

There are several ways to look at the national debt. What you hear most frequently is the total debt in current dollars, but not counting the unfunded liability for future Social Security and Medicare payments. Whether those unfunded liabilities should be included in a calculation of the total debit is a subject for another day. For now, we’ll stick with the Treasury’s numbers on the total “official debt”.

So, let’s start with the actual numbers. The chart is pretty scary.

That is a 77-fold increase since 1950. Particularly alarming is how much steeper the line has become over time.

Many economists argue that the absolute debt is not as important as its percentage of GDP, reasoning that GDP is the best indication of the country’s ability to service the debt (i.e. make payments as they become due). To put debt as a percentage of GDP, we need to go back a little farther to get a better historical perspective.

The big spike to left side of the chart represents the debt the federal government incurred to wage WWII. After gradually reducing the debt as a percentage of GDP post-WWII, the deficit has been growing since the early 1980s, taking particularly large jumps during the Reagan administration, the second term of Bush 43 administration and the first term of the Obama administration. I don’t think that it is a coincidence that these were also the time periods in which we had the lowest tax rates.

What is even more alarming is that the nonpartisan Congressional Budget Office projects that deficits will continue to grow significantly. Before taking the new tax bill into account, the CBO projected that the debt will grow by another $10 trillion over the next decade, with annual deficits exceeding a trillion dollars annually in 2027. Our debt will be about 110% of GDP at that point, a level never reached previously except at the height of WWII. All indications are it will continue to get worse after that.

Most economists are projecting the new tax law will add roughly $1-2 trillion to the CBO’s projection. So, the effect of the new tax law is not the end of the world as Democrats have argued, but it is clearly going in the wrong direction and will likely make a bad situation worse.
No one knows exactly what the effect of this level of debt will be. Is there a point at which the market will decide the federal government is not creditworthy and refuse to purchase it debt, or charge exorbitant rates? Does it mean that economic growth will be hobbled for the indefinite future? One thing we know for sure is that our economy has generally grown slower as the debt has increased.

Coincidence does not necessarily prove causation. But most countries with high debt to GDP ratios also have lower growth rates.  In any case, I think we all can agree that this level of debt is not a good thing.

Who’s to Blame?

Most of the commenters to my Texas Monthly essay were partisans on either side of the aisle blaming the other side for the ballooning debt. So, let’s take a look at the record through that partisan lens.

Frequently people want to attribute the increase in the debt solely to the party in control of the White House. But it is Congress that actually has the power of the purse strings. So, which party has control of Congress should also be a consideration.

Since 1950, the Republicans have controlled the White House for 36 years and Democrats for 31 years. There have been 19 years in which the Democrats controlled the White House and both Houses of Congress, to only 5 for Republicans. For 43 years there has been some combination of divided government. I took the average annaul deficit as a percentage of GDP for a variety of combinations. I shifted the averages back one year since the government’s fiscal year ended either on June 30 or September 30 during this time period and, therefore, the incoming Congress or President inherited its first-year budget from its predecessor. Here are the averages:

While there is some fodder here for each side to make a tortured argument about how their party is most fiscally responsible, the narrowness of the range of outcomes is telling. What the chart really shows is how utterly nonsensical it is to try fashion a partisan explanation for the country’s unsustainable fiscal trajectory.

But we need no contortionistic partisan theory about the cause. The deficits have been gradually getting worse since the early 1980s as a result of our federal government gradually spending more of our national income and collecting less of it in taxes, with the sole exception of 1998-2001.

This is exactly what Alan Simpson and Erskine Bowles concluded when they chaired the National Commission on Fiscal Responsibility and Reform in 2010. While one may quibble with their specific prescriptions, they nonetheless clearly showed that the deficit can only be addressed through both raising revenues and decreasing spending.  They were especially adamant about addressing the coming explosion in the costs of Social Security, Medicare, Medicaid and interest on the national debt. [Click here to read their report.]

Both parties are dedicated to putting more money into the pockets of the special interests they represent and taking money away from the other party’s supporters. Neither has any interest in addressing the country’s unsustainable financial trajectory, because that would force them to say “No” to the special interests that support them. And that is something neither party has the moral courage to do.

Of course, this is exactly what George Washington predicted in his Farewell Address. “[Political parties] are likely, in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.” How prophetic.

As long as the American people continue to allow these two corrupt political parties to carry on this charade and to pay for their thirst for power with public’s credit card, nothing will change. So, here’s my suggestion. Instead of thinking about how much you hate the opposing political partisans, think about how much you love your children and grandchildren. Because they are the ones that will pay the price for the hyper-partisanship which is responsible for the crushing national debt they will inherit and which is likely to lower their standard of living and make their country less secure.

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Federal Deficits are the Result of Rising Expenditures and Falling Receipts

Contrary to the partisan narratives of our two dissembling political parties, federal deficits have been growing steadily since WWII through every administration, with the sole exception of the Clinton administration.  The growing deficits have been the result of the federal government spending more of our gross national output and collecting less.  Here is what the record looks like for each administration.  I have offset the data by one year to account for the fact that each incoming administration inherits the budget for its first year from the previous administration.[i]

Democrats will tell you that the deficits are the result of Republicans cutting taxes and Republicans that they are the result of out of control spending.  Both are right and both are wrong.

First, I suspect most of you will be surprised to know that the amount that the federal government has spent and collected in taxes since WWII has moved in fairly narrow ranges.  During that period the most the government has ever spent of the country’s GDP was 24.4% in 2009.  The least was 16.6% in 1965.  For tax collections, 20% was the high in 2002 and 14.6% was the low in 2009 and 2010.

But notwithstanding that the expenditures and collections have moved in these narrow ranges, the trendlines are clear. The federal government has been spending more and collecting less in taxes as a percentage of GDP since WWII.

The effect on federal receipts and expenditures from the 2008 financial crisis is a notable outlier to the general trend and is a cautionary tale about making sure we avoid that type of crisis in the future.

While reviewing the historical record is always a useful exercise, especially when debunking partisan propaganda, it is probably less helpful in considering where the federal budget is likely to go from here.  That is because we are about to enter a period where the cost trajectory of three programs, Social Security, Medicare and Medicaid, is about to explode.

In 2007, those programs cost about $1 trillion.  By last year, they had doubled to just under $2 trillion and accounted for nearly 50% of all federal spending.  The Congressional Budget Officer (CBO) projects that they will rise to $3.6 trillion in the next ten years.  Of the three, Medicare rises most, more than doubling.  These increases are, of course, driven primarily by demographics as our population will grow significantly older in the next ten years.

By comparison, the total amount the federal government spent on all welfare programs last year was about $270 billion, or 27% of the big three and 7% of all federal spending.  Welfare expenditures are up by about $110 billion over the last ten years (about a 70% increase).  The CBO projects that, based on current programs, welfare spending will be relatively flat over the next decade, rising only about 15%.

One chilling metric is the CBO’s projection of the federal government’s interest cost.  Because of falling interest rates, there has been almost no increase in the government’s interest cost in the last ten years (2006 – $227 billion vs. 2016 – $240 billion).  But the CBO projects that the interest expense will more than triple by 2027 to over $800 billion because of the exploding deficits they expect in the next decade.

Both political parties promote narratives to explain the structural deficit in the federal budget that resonate with their respective constituencies and have a grain of truth but ignore the elephant in the room.  Welfare queens or greedy corporations may contribute nominally to the federal deficit, but it is principally being driven by an aging population with the enormous medical expenses that demographic change will drive.  That is the real inconvenient truth that neither party wants to address because the solutions are hard, complicated and fraught with political peril.

[i] All of the data in this article is expressed as a percentage of gross national product.  The gross numbers, because of population growth and inflation, would obviously show much more dramatic increases, but economists almost universally agree that the amount that the government spends and collects as a portion of the economy’s national output is the critical metric.

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Judging Administrations by the Stock Market

Since Donald Trump was elected, the stock market has been on a tear.  The S&P 500 Index has soared from 2085 to 2579, a nearly 24% increase.  The president’s supporters point to this increase as evidence of the effectiveness of his administration.  So, I thought it would be interesting to look at the market’s performance under previous administrations to see how the Trump administration compares.  I used Macrotrend’s inflation adjusted historical data to make comparisons [click here].

This is what the chart looks like for the total increase/decrease during each administration since Carter.

The market increases during the Clinton administration dwarfs all others.  I found it interesting that the appreciation during the Reagan administration was only about average, since that period is often heralded by Republican as some kind of golden age of economic growth.

Of course, looking at the aggregate increase for the entirety of each administration is not a fair comparison for the Trump administration, since it has only been one year since his election.  If we look at the average annual increase for each year, the Trump bump looks much more impressive, coming in second only to Clinton (22% vs. 21%).

 

But, if you look at the increase during the first year after the election, Trump takes first place, edging out Bush 41 and Obama (23% vs. 21% vs. 18%).  Note that the index was actually down during the first year of the Reagan administration.

So, what are we to make from this mishmash of data?  The answer is: not much.  While the political backdrop is important for the stock market, there are nearly an infinite number of other factors that also affect the markets, not the least of which is interest rate policy as set by the Federal Reserve.

It is undeniable that there has been a surge in business optimism since Trump’s election -most likely a wave of relief after eight years of the business-unfriendly, regulation-happy, Obama administration. And frequently psychology is as important, if not more so, than economics to the stock market.  But in the long run, economics wins out.

The real reason the market has steadily increased since 1950 is that corporate profits have increased.  In fact, there is nearly a perfect correlation.

 

If corporate profits keep going up, so will the stock market.  Of course, if the Republican tax bill is approved and corporate income taxes are slashed, those savings will immediately go to the bottom line and further support higher stock prices, at least to the extent that this is not already baked into the market.

The bottom line is that while who the president is and what his or her policies are obviously have an effect on the stock market, it is a mistake to credit any president with causing the markets to go up or down.  To believe otherwise, one must credit the Obama administration with causing the largest dollar increase in corporate profits and stock prices in the nation’s history, a proposition many would have a hard time accepting.

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