Source: Visual Capitalist
The US Debt Ceiling Has Risen No Matter Who Calls the Shots
October 27, 2015 4:30pm by Barry Ritholtz
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I think it was this site where I saw the term “Denominator Blindness”. It is not the debt that really matters it is “debt to GDP ratio” that matters.
https://research.stlouisfed.org/fred2/series/GFDEGDQ188S
When Has Our Debt EVER Hurt Us?
By 2015, federal spending was 454% higher and the national debt was 19 times greater than when Pres. Reagan took office in 1981. The debt was 421 times bigger than in 1940 when Pres. Franklin Roosevelt was re-elected to his third term and more than 800 times greater than in 1933 when we abandoned the gold standard for our money.
https://www.whitehouse.gov/omb/budget/historicals Table 1.1 http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm
The consequences: private sector jobs increased 60% since Reagan’s inauguration, real GDP has increased 1190% since 1940 and industrial production has increased 2632% since 1933. Private sector jobs have more than quadrupled since 1940 and total employment today is at a record high over 142 million.
https://research.stlouisfed.org/fred2/series/USPRIV https://research.stlouisfed.org/fred2/series/GDPC96 https://research.stlouisfed.org/fred2/series/PAYEMS https://research.stlouisfed.org/fred2/series/INDPRO
We had our highest debt-to-GDP ratio after WWII, then increased the debt 82% and federal spending 725% over the next quarter century from 1948, producing our greatest prosperity: a 168% increase in real GDP.
When will debt phobia end?
I think the problem is that most non-economist folks look at the national budget as a large version of their own personal budget. For individuals debt is a concern that can develop into a major problem. For individuals you reduce spending if your income is reduced.
They don’t get that government is working with completely different rules during an economic slowdown. If it reduce spending it further reduce its income. If it doesn’t hire someone to do work it will have to pay them anyway in form of unemployment and other social assistance (or jails). In a tight spot government can always print more money to pay the bills.
Also, many people seem to have no concept of what the actual data means. 100% of GDP! Oh no! I don’t know about you, but the amount I owe on my house is much larger than a single year of my income. 100% of GDP sounds scary, but it’s really not. Even looking at government debt through the lens of household finance, as most people do like you said….those numbers sound much scarier than they are, they’re really not the disaster it’s made out to be. Having more debt than a single years worth of income is not that uncommon a situation.
Actually the “personal budget” line doesn’t hold up either. People ask for raises, change jobs, take money out of savings, borrow for a car so they can get to work, education, house, etc.
1970-2008=9 trillion
2008-present = DOUBLES to 19 trillion
Following your logic, why not raise the debt to 50 trillion and pass out checks to everyone to spend on anything they desire? Paradise, indeed.
There is no way in hell this will not end badly.
We are already above $50 trillion…
Before this series was discontinued, we hit $60 trillion total debt.
https://research.stlouisfed.org/fred2/graph/?g=2ieP
Doubling the debt in 6 years has happened many times (actually under Reagan it went from 1 to 4 trillion). Every time there has been cries of impending doom – and we are still waiting.
But you are right that instead of passing all that money out to a few defense contractors and the plutocrats that own those companies, we should hand out a few thousand dollars to every person in the country. At this point in the cycle people are ready to spend money if they just had the income.
And some people claim that when you hand out money by tax-cuts it ends up paying for itself by increased economic growth. This proposal for handouts is a lot more economically stimulating because it targets the consumer class, so it may actually end up paying for itself.
I agree with your point, but the debt has hurt us. It has hurt us because many of our leaders perceive it is a financial problem and therefore adopt stupid policies accordingly. Note that every one of the 16 times in the past 200 years when there has been some attempt to pay down the debt, the latest during the Clinton Administration, it has cause a recession or depression and they sucked financial resources out of thee economy.
It would be useful to show this as a percent of GDP.
Yup … I suspect that one would find that debt loosely tracks GDP … or perhaps it is the other way ‘round … an excess of debt would tend to indicate economic stimulation, with a significant excess of debt (relative to GDP) likely leading to inflation, while a paucity of debt would send us the other way, into deflation and a spiraling downward.
So which is it that we observe today, inflation or deflation?
This is, of course, an overly simplified argument, as are ALL economics arguments and theories … still, when you throw this up against the wall of Reality, it seems to (mostly) stick …
I should clarify that when I say “debt” in an unqualified usage of the term, I generally mean ALL debt, federal+consumer+corporate.
And the relationship between GDP and debt is almost certainly not a dollar-for-dollar relationship, despite the largely-debunked notions of Reinhart and Rogoff, who failed to demonstrate that once a nation passes some fixed debt limit, they are toast. It probably varies according to the mix of public, corporate and consumer debt (with consumer debt including mortgage debt, in my usage), which would be a great research topic for some future economics grad student.
This is what I mean when I refer to “an overly simplified argument”. Economies are never as simple as the politicians and economists would have one believe.
“And the relationship between GDP and debt is almost certainly not a dollar-for-dollar relationship, despite the largely-debunked notions of Reinhart and Rogoff, who failed to demonstrate that once a nation passes some fixed debt limit, they are toast.”
I stopped working in economics a few years ago and really don’t follow much of the research anymore. I’m curious about this comment, when I left the profession their paper was a big deal, though my interpretation of it is a bit different than yours; I saw their paper as evidence that eventually a large amount of debt eventually starts to negatively affect an economy (though not necessarily to the degree that the economy is toast), which makes sense as the more you spend on servicing debt the more money is being shipped elsewhere that could be used on productive assets (I think it probably matters who owns the debt, there’s likely a big difference in effect between debt owned locally vs owned by international debtors). I haven’t really followed anything that’s happened since the release of that paper, though, wasn’t there something about data errors? Has there been followup research confirming/refuting their point?
“It probably varies according to the mix of public, corporate and consumer debt (with consumer debt including mortgage debt, in my usage), which would be a great research topic for some future economics grad student.”
Yeah, I would think so too, would definitely be an interesting research topic if nobody’s looked at it before.
This article has the ratios over time. http://www.businessinsider.com/budget-deal-implications-austerity-spending-valliere-2015-10
Clinton era = 23% down to 18.5%
Bush era = 18.5% up to 23%
Obama = 23% up to 25% down to 22%
Consultants who work for the fear mongering industry and political touts make good money
That answer your questions?
What really stands out, in my observation, in https://research.stlouisfed.org/fred2/series/GFDEGDQ188S is how Barack Hussein Obama was dealt a really bad hand on his first day in office.
Yes a financial crisis and an economy dropping off the cliff is a nasty challenge. Unemployment increasing by 3/4 million per month not only drastically increase expenses it also sucks away tax revenue. The amazing thing is that after stopping the disaster handed to him by the incompetence of his predecessor, his job growth rate was almost as good as the record breaking job creation under Clinton – in spite of all the obstructionism and sabotage from GOPsters hellbent on sinking the economy to make him a one term president.
Its still his fault.