US Debt & GDP

[Starlight]

A lot of people here get very wound-up about the US national debt. I agree that debt is bad. But let's be clear on some basic facts about it. So to summarize and continue a conversation from here...

Federal_Debt_Held_by_the_Public_1790-2013 (1).jpg
(US public debt as a percentage of GDP from here)


(US GDP over time from here)

Some basic points:
1. The GDP of any developed country always grows at a constant rate of 1-2% per year due to gradual technological advancement, and so follows the gentle upwards curve depicted above. Even pretty serious occurrences like world wars and global financial crises affect the GDP only minimally and temporarily, and it quickly returns to its standard rate of year-on-year growth. Nothing any politicians do changes this. So any politician who promises to massively grow the economy is simply lying... that just doesn't happen.

2. Public debt is typically measured in comparison to GDP, because that gives a figure representing how easily you can afford to repay your debt. (A debt of $10k is tiny to a person who earns a salary of $100k per year, but is huge to a person who earns $5k per year) So comparison between countries is always done in terms of the debt to GDP ratios.

3. The highest the US debt ever got was after WWII. At that time it was higher than it is now (in terms of the debt to GDP ratio). And then, as the first chart above shows, it quickly shot downwards. So the current "debt crisis" that a lot of US posters here worry about is largely a myth... the current situation is not as bad as the post WWII situation and that was handled with a ~15 year time-frame. So there is nothing unprecedented, disastrous, or unsolvable about the current debt situation.

So how did they solve it? The simple answer is that from 1945 to 1969 the federal government ran a budget that was mostly pretty close to balanced. They did this with whopping-high tax rates that went up to 91% on highest-income earners.

They didn't really pay off much of their debt... in fact in absolute numbers it increased over that time. But that works out as essentially a massive decrease. Why? Because: 1. Inflation, and 2. GDP growth. Neither inflation nor GDP growth were anything unusual during that period - the two were pretty much steady at their average historical levels - both around 2%. But both effects eat away massively at the effective debt on a year-in year-out basis: Reducing the national debt by a combined total of 4% every year, which led to a 60% reduction after 15 years, without having to actually pay off a single cent of the debt... which is the dramatically downwards curve shown in the post-WWII years in the debt chart above. People might be (wrongly) inclined to assume that therefore this isn't a "real" reduction in debt... but it absolutely is: In 1945 the federal government would have had to spend ~200% of its total income to pay off the national debt, whereas in 1969 it could have paid off the debt by spending only ~70% of its total income, ie much much more easily.

You're looking at Wikipedia for information on something as controversial as the US public debt?

Um, you realize that the debt is like a factual number? There's nothing controversial about what the debt is in a given year. Your moronic aversion to wikipedia is irrelevant given that these numbers are matters of historical fact and not debatable.

And you're looking at debt relative to GDP with this graph, not absolute debt.

GDP didn't suddenly fluctuate in the period under consideration. There is nothing wrong with the measure of debt relative to GDP.

The reason that the ratio went down was generally because the economy grew, not because of any actual reduction in debt.

If your income doubles but your debt remains constant, has it gotten easier to pay your debts or are your debts still as much of a problem as ever? The answer is simple: Your debts have gotten easier to pay. And equally if someone lent you $50k to buy a house in 1980, and in 2015 you sell that house and repay them the debt, then inflation says that house is now worth ~$150k, so you can pay them back the $50k easily and pocket $100k for yourself. Inflation and income increases both reduce the relative size of debt (which is what matters), even though they don't reduce its absolute dollar value (which is irrelevant).


That all said, debt is absolutely a bad thing, and countries ought to not run up debts, and ought to prioritize paying them off. I would recommend the following solutions in order of first-is-best last-is-worst:
(a) raising taxes to pay them off quickly
(b) minting money to pay them off quickly (this has the added advantage of raising inflation, which itself shrinks the debt)
(c) simply balancing the budget to rapidly reduce the effective size of the debt (as the US did in the 1950-1969 period)
(d) defaulting on the debt and declaring they simply aren't going to pay it.

[Rational Gaze]

All of your proposed "solutions" would actually make the US economy worse. They are the policies of failed empires since at least the Romans. For example:

Pre-Revolutionary France
“The closing years of Louis XIV's reign were sombre. The war of the Spanish Succession, which began in 1701, was a chapter of disasters, as enemies old and new stripped the gilt from the ageing king's gloire. On the home front, bankruptcy was staved off only by the sharp increase of existing taxes, the introduction of new burdens, and the resort to self-defeating expedients such as the debasement of the coinage, the sale of offices, and the sale of tax exemptions." - Tim Blanning, The Power of Culture and the Culture of Power, Oxford University Press, (2002), p103

We all know how well THAT turned out.

Then there's Weimar Germany, 1920s and 1940s Hungary, 1990s Yugoslavia, early 2000s Zimbabwe. This is not a new plan. It is the oldest trick in the book. The only reason the US does not have super-inflation yet is because the majority of dollars are located overseas. The second, however, oil stops trading in dollars, then all those overseas dollars will come flooding back to the US economy and bankrupt the nation overnight. Which is why the US is constantly meddling in the affairs of Middle Eastern nations.

(It is often claimed that Japan's woes were due to deflation, but were actually result of the inflationary monetary policies that were aggressively pursued by the Japanese government and its central bank: https://mises.org/library/japanese-d...2%80%99s-slump
https://mises.org/library/should-japan-fight-deflation)

These policies may work temporarily in the short run, but in the long run, they only ever lead to bankruptcy. Here is a visual demonstration:
10363960_733706516673036_1807464948240071081_n.jpg

Inflation hurts REAL wages. It does not matter what the NOMINAL value is, the REAL value is lowered. Prices go up, and then you get hairbrained policies like minimum wage laws that fuel inflation in a neverending spiral. Add in the costly, burdensome

The actual solution, and the one that should be self-evidently obvious to anybody with more than only half a brain, is to cut spending and to lower taxes. Considerably. Moreover, we need to abolish central banking and adopt sound money and free banking. Next, the elimination of costly and burdensome regulations and simply let market forces fix the damage successive generations of government meddling has inflicted upon the global economy.

[Starlight]

The stupidity in your post is mind-numbing.

[Joel]

I would recommend the following solutions in order of first-is-best last-is-worst:
(a) raising taxes to pay them off quickly
(b) minting money to pay them off quickly (this has the added advantage of raising inflation, which itself shrinks the debt)
(c) simply balancing the budget to rapidly reduce the effective size of the debt (as the US did in the 1950-1969 period)
(d) defaulting on the debt and declaring they simply aren't going to pay it.

The option of reducing spending is absent from your list. Where would you add that to your list?
(It could happen as a type of (c), since (c) could, mathematically, arise from either increased revenue or decreased spending, or both. But (c) doesn't include something like "cutting spending to pay them off quickly".)

[Starlight]

The option of reducing spending is absent from your list.

It's part of c.

The reduction of spending alone is not typically a great strategy as a reduction in government spending tanks the economy in the short term, which in turn reduces government income in the years immediately following due to loss of potential tax revenue. That's why Greece is having such serious problems at the moment... austerity is really hurting their economy in the short term. Kansas is having similar issues. And while economies are resilient and long-term will recover, recessions/austerity can be very unpleasant for the people living through them. That's why cutting spending should be done very gradually, and generally raising taxes rather than cutting spending is the preferable option (inflation will gradually cut spending for you anyway, if you can hold the dollar amount being spent constant), especially as there is huge scope for that since taxes on the wealthy are now close to record lows since WWII.

[Mountain Man]

The stupidity in your post is mind-numbing.

And now Dimbulb has started talking to himself.

[Truthseeker]

.
It seems possible that a reader or two are thinking like this:

"Our governments usually do more good than bad. Therefore, the more spending they do, the better off the world would be." Why worry about a nation's debt, it makes no sense, we all should prosper because the governments are spending hugely. Whee!

[Starlight]

"Our governments usually do more good than bad. Therefore, the more spending they do, the better off the world would be." Why worry about a nation's debt, it makes no sense, we all should prosper because the governments are spending hugely. Whee!

Well such a person should simply think about their own spending. They (presumably) spend money on things that overall make them happier and make their life more satisfying. So if they spend more and more money and spend their way into debt, then will their life be amazing and will they prosper hugely? The answer is obviously "Yes, they will probably greatly enjoy themselves in the short term... until their money runs out, and then they are going to have a lot of debt that is going to be problematic in the long-term."

[Roy]

That all said, debt is absolutely a bad thing, and countries ought to not run up debts, and ought to prioritize paying them off. I would recommend the following solutions in order of first-is-best last-is-worst:
(a) raising taxes to pay them off quickly
(b) minting money to pay them off quickly (this has the added advantage of raising inflation, which itself shrinks the debt)
(c) simply balancing the budget to rapidly reduce the effective size of the debt (as the US did in the 1950-1969 period)
(d) defaulting on the debt and declaring they simply aren't going to pay it.

I'd have thought c-a-b-d was a better ranking order.

[Joel]

It's part of c.

Raising taxes too could also be considered just part of c, but you separated it out as a separate item--as (a).
So if you had to add "cutting spending to pay them off quickly" (which is outside the scope of (c)) where would you add it?
Do you think it's even worse than your (d)?

The reduction of spending alone is not typically a great strategy as a reduction in government spending tanks the economy in the short term, which in turn reduces government income in the years immediately following due to loss of potential tax revenue. That's why Greece is having such serious problems at the moment... austerity is really hurting their economy in the short term.

I don't think this is correct. After WWII for example, there was a reduction in annual federal spending by 75% in 3 years. (There was also a 30% reduction in taxation. Spending came down by more, and eliminated the enormous deficit.) The Keynesians warned that this would tank the economy as you warn here. But instead it was immediately followed by a period of prosperity. If spending is reduced to eliminate a deficit, it immediately frees up those funds for other (and almost certainly more-productive) investments.

Greece's austerity included tax hikes, so that's not a good example.
I don't know much about Kansas, but it's rate of reduction in spending (about 18% over 5 years) was much less than that of federal spending after WWII, and is expected to go back up after this year. (Looking around, it seems more federal tax money is spent in Kansas than the Kansas state government spends. So factoring that in, the 18% number would be more like 9% reduction in government spending in Kansas spread over those 5 years.)

I also recall seeing a study about austerity in Europe since 2008, that found that countries whose austerity consisted mostly of cutting spending did well, and those countries whose austerity consisted mostly of raising taxes did poorly.

there is huge scope for [raising taxes] since taxes on the wealthy are now close to record lows since WWII.

(a) Raising taxes to pay off the debt quickly is probably not feasible. Federal revenue has hovered around 16-18% of GDP since WWII, despite wide variations in tax rates, including times of "whopping-high tax rates" as you described. In 2015, federal tax revenue is about 17.66% of GDP, while it averaged about 16.4% from 1945 through 1980, and rarely got as high as 17.66%

Federal spending, on the other hand, has been over 20% of GDP since 2008, and is expected to keep rising. Because it is not feasible to increase tax revenue that high, what is needed is for spending to come down, at least as a percentage of GDP. (Not to mention raising tax rates is an economic depressant.)


As for your printing money option:
(b) There's not really an existing mechanism for doing that. New money is created by the Federal Reserve when it purchases assets. The Fed can purchase and hold Treasury debt, but the Treasury still is obligated to pay interest on that debt and pay the principal when it comes due.

[Truthseeker]

Well such a person should simply think about their own spending. They (presumably) spend money on things that overall make them happier and make their life more satisfying. So if they spend more and more money and spend their way into debt, then will their life be amazing and will they prosper hugely? The answer is obviously "Yes, they will probably greatly enjoy themselves in the short term... until their money runs out, and then they are going to have a lot of debt that is going to be problematic in the long-term."

One person's excessive spending does not necessarily or even not probably lead to greater happiness than otherwise (frugality). But does that point apply to government spending (after changes that need to be made to suit the new argument) as well? Are you really skeptical that any government spending that results in increased debt would probably lead to greater happiness in the society, overall, because governments will always tend to do more good than bad, even when they are spending excessively?

[Rational Gaze]

Anybody who seriously advocates artificial inflation and higher taxes as a positive thing is an economic illiterate who has never studied history. There is no single example of such policies ever saving a nation from economic crisis. Whereas, history is replete with nations that destroyed their economies through such policies.

[Truthseeker]

. . . excessively?

I should have wrapped that word in quotation marks: "excessively."

[Starlight]

I'd have thought c-a-b-d was a better ranking order.

There is some legitimate confusion as to what the difference between 'a' and 'c' were, as I wasn't very clear. My intention was that in 'a' and 'b', the debt is actively paid off. This is done by sourcing additional income (from (a) taxes or (b) minting money) in order to rapidly pay off the debt, in order to rapidly return to a situation where the debt is zero (and better yet, a situation where the government's balance sheets are positive). Option 'c' by contrast, is a situation where only the interest on the debt is being paid, and the principal remains the same (and is merely decreasing in relative amount due to inflation and GDP growth), as the government is simply running (relatively) balanced budgets and neither adding to nor reducing the debt (although it is paying interest on the existing debt, and this is an obvious cost which is generally the motivation for getting rid of debt).

[klaus54]

Anybody who seriously advocates artificial inflation and higher taxes as a positive thing is an economic illiterate who has never studied history. There is no single example of such policies ever saving a nation from economic crisis. Whereas, history is replete with nations that destroyed their economies through such policies.

Excellent!

"Progressives"/Socialists don't see the distinction between paper money/coinage and real wealth and productivity.

The only possible way to balance a budget without inflation is to cut spending.