Wednesday, March 13, 2019
When I studied macroeconomics in college in the late 1970s, the U.S. debt/gdp ratio was about 30%. That was considered a little high, but not excessive. According to our text, Nobel laureate Paul Samuelson’s Economics, federal spending could run deficits in periods of economic weakness, but the federal budget was supposed to be balanced over the course of a business cycle.
I began to plan this post when I recently learned that our national debt now exceeds $22 trillion. (each American's share of this debt is about $68,000)
When I examined the pertinent data, my hypotheses were confirmed regarding Congress’ long term lack of spending discipline. Having confirmed my hypotheses regarding federal debt and spending growth regardless of gdp growth, I began writing this post.
I have not seen all of this data, analyses, nor conclusions presented in one place anywhere else.
Data reveal that during the 48 years, 1970-2018, the U.S. posted budget surpluses in only 4 years, 1998-2001. The average surplus was $139.8 billion, while the average deficit was more than double that, or $317.9 billion.
For the period 1970-2018 nominal U.S. gdp grew at a compounded average growth rate (cagr) of 6.3% while federal debt during at a cagr of 8.8%, more than 2 percentage points faster than the gdp supporting that debt.
(at this point in the post I intended to insert 3 excel graphs, debt/gdp over time, gdp and debt growth over time and annual budget deficits and surpluses. However, my attempts to insert the charts have been unsuccessful.)
Such a situation of federal debt growing faster than gdp over a long time period, violates basic tenets of economics.
Congress appears unable to say, "no" to any spending demands. Our representatives and senators appear to have lost sight of the national interest of fiscal health, instead buying reelection by voting for excessive spending while incurring crushing levels of debt on our behalf rather than taxing us to pay for that spending now.
The accompanying charts demonstrate this conclusion. This is a bipartisan problem, Congress has spent recklessly regardless of which party was in the majority. Congress passed the inappropriately named budget control act of 1974, establishing the cbo, and effectively removing the president from the federal budget process.
Congress went even further, when President Nixon attempted to decline to spend all the funds appropriated by Congress in the budget one year, the democrat-controlled Congress sued Nixon, to force him to spend all appropriated monies. In a decision which has had tragic consequences, the court decided in favor of Congress, effectively removing the only constitutional check on Congress' fiscal irresponsibility. That decision has since become known as, "impoundment."
If global investors decide that holding U.S. debt has become riskier due to America’s level of debt outstanding, either or both, of two catastrophic outcomes could occur. Investors could demand much higher interest rates on U.S. debt, or could simply decline to buy all of the debt we wish to offer.
In the latter instance, the shortfall would have to come from additional tax receipts. Governments do not directly create economic value. They may generate resources to spend in only two ways, sell debt or levy taxes. At some point all governmental borrowing must be repaid, with interest, as bonds and notes mature. These debt payments ultimately come from taxes.
The 2018 federal budget deficit of $778 billion was composed of net outlays of $4.1 trillion and net receipts of about $3.9 trillion.
It concerns me that my children's generation will probably experience a severe reduction in its standard of living through much higher interest rates on new federal debt and/or higher tax rates to repay some of the debt or less federal spending to achieve that rarity, federal budget surpluses.
To grasp the magnitude of the federal spending problem, consider these arithmetic facts, if Congress could manage to achieve budget surpluses,( a feat not achieved since 2001) of just the average of 1998-2001, $140 billion, it would need to achieve such surpluses for roughly 70 years to cut the debt almost in half to achieve a debt/GDP ratio of only the still dangerously high 50% from its current 110%.
Congress would suddenly have to rediscover spending discipline, which it has lacked for the last 17 years. Additionally, the U.S would require 7 decades of high GDP growth with low inflation and no major wars, if history is any guide, that would be nearly impossible.
In the last 10 decades the U.S. has experienced at best, just 2 such decades, the 1920s and 1950s or 1960s.
Therefore, with its current high GDP growth, low inflation and no global wars, Congress must cut spending to achieve significant budget surpluses immediately. For, if not under these benign conditions when will Congress begin to cut the immense federal debt that it has created?
All data are nominal because federal debt is incurred, and must be repaid in nominal, not inflation adjusted dollars. All data sourced from Saint Louis Federal Reserve