Posts Tagged ‘Spending’

h1

Houston, We’ve Had A Problem Here!

February 17, 2019

While the problem we face today is not as perilous to life and limb as when Jack Swigert immortalized those words in April of 1970, as Apollo 13 had its cascading failures, we still have an issue that has the potential to lead to a cascading failure of our economy.  Perhaps it is better to put it “America, we have a problem here!”

That problem is our national debt.  The current national debt exceeds $22-trillion. It has never been that high before.  To service the debt (pay the interest and principle we owe) requires more and more of the government’s annual income from taxation.  The more we pay to service the debt, the less there is for things like the military and the other departments of the government.

It is easy to get caught up in pointing fingers at this President or that, one Congress vs. another, but that does nothing to address the issue before us.  We must cut costs AND raise income to reduce the huge debt we owe.  If we wish to avoid a financial crisis such as the one faced by Greece recently, we must address the issue now.

Historically, we’ve used our national debt to spur the economy, and it has worked, but what is too much debt?  At what point is the burden of debt more harmful than the upswing in the economy?  One of the common measures of national debt is as a percentage to Gross Domestic Product (GDP).  When looked at like this, we can see some interesting trends since 1950.

The chart shows the GDP for each President’s last year in office.  Two datasets are used, the first being the actual Last Year In Office (LYIO) and the second being the Last Budget Year (Last BY).  They very slightly and illustrate our National Debt does correlate to the influence of the President.

Here are the percentages using data from the US Bureau of Economic Analysis:


*President Trump’s figures are
estimated for end of 2019

What is interesting is what was going on with the US economy when we increased the percentage of debt to GDP.  When the Great Depression hit, and throughout World War II, we increased our national debt to keep our economy growing.  After the war, we were able to reduce the percentage ratio by controlling spending, keeping revenues high (taxes) and growing the economy and our GDP output.  From President Truman through President Carter, the ratio of National Debt to GDP either went down or took a slight bump (i.e. the Nixon/Ford years) upwards.  Then came President Reagan!

President Reagan had two primary priorities as President.  The first, repair the damage to the office of the president caused by the resignation of President Nixon and Watergate.  Second, stop the Soviet Union’s increasing influence in developing nations.  It is the second priority that had such a drastic effect on our National Debt.

Regardless, if you agree or disagree with President Reagan’s approach to the Debt, in the end, forcing the Soviet Union to match our spending and buildup of our military did have the desired result, their economy collapsed, and the Union fell apart.  Of course, there are a million other contributing factors for the collapse, but the spending is one of the primary factors and certainly drove our National Debt up – way up!

While President H.W. Bush was President in 1991 the Soviet Union formally dissolved, it was at the beginning of his term.  We also fought the Gulf War in 1991, but as wars go, it did not have a huge impact on the National Debt.   At that point, we could have started reducing the Debt but there was a push for “no new taxes” and President Bush’s signing of a modest increase into law cost him his reelection bid and Congress had little incentive to work on the issue and the National Debt went up.

Then it was President Clinton’s turn.  Putting his personal failings aside, his term as President showed it is possible to grow the economy, eliminate the budget deficit and reduce the National Debt percentage when compared to GDP.  We could have used the surplus to reduce the National Debt further by buying back a portion of our debt, much like companies are doing right now with stock buy-backs, instead, it was paid out more like a dividend through a reduction in the tax rate after President Clinton left office.

President George W. Bush entered office and a cacophony of events that upset everything followed.  First, President Bush acted on the surplus in the budget by cutting taxes in Jun of 2001.  Then the 9/11 tragedy happened.  Not only did it cost a considerable number of lives, but it also damaged our economy.  Airlines were the hardest hit, but industry, in general, took a punch and the country was in the mood to give business a break.  That break came in the form of another tax cut in 2003.  So, we began the war with Afghanistan, and while still underway, began one with Iraq, cut taxes and to no one’s surprise, our National Debt increased at a fast pace.  At the same time, the budget deficit returned.

Unlike when FDR battled the Great Depression and World War II, both of which drove up the National Debt, we did not raise taxes to offset the increase in spending.  We financed the increase by selling government securities.  Securities have to be paid for at some point, with interest.  

Also, under President GW Bush, deregulation, which was started by President Clinton, picked up and our financial institutions followed the same type of disastrous path they did in the 1920s.  It all came to a head in 2008 with the worst financial crisis since the Great Depression. 

When President Obama took over, the economy was in the toilet, we were at war, and tax revenues were down.  We needed to jump-start things and it was done with a very large economic stimulus package.  Again, by increasing the National Debt. Again, just like FDR’s various programs, the economy recovered.  Once our economy had legs, we began to reduce the deficit.  At its highest in 2009, it was $1.4-trillion.  In 2013 it was down to $753-billion, or about half of its highest.

It should be noted, to decrease the National Debt requires buying back the debt.  To buy back the debt a surplus is required in the budget.  We will only have a surplus by cutting spending or raising taxes or better yet – both! 

Now it is President Trump’s turn.  Rather than continue to reduce the deficit and working towards reducing the National Debt, we have increased our rate of borrowing money (over $2-trillion since President Trump took office) and we cut taxes again increasing the deficit.  Our National Debt is getting to a dangerously elevated level.

By the end of 2019, our National Debt will be around 109% of our GDP.  When Greece had its financial collapse, their National Debt was 143% of its GDP.   While our economy is much more dynamic than Greece’s, we still need to fix this problem now, before we take on more debt than we can repay.

We are beyond the typical liberal/conservative approaches to governance.  We need to work the problem with every tool we have.  Liberals will not like cuts, conservatives will not like corporate taxes, but both are needed to address this.  What we don’t need is companies, like Amazon, earning billions in profits and paying little to nothing in taxes.  Reports show Amazon will earn about $11.2-billion in profit this year and pay zero in taxes.

To be clear, it is not Amazon’s fault.  They are simply using the tax code to their best abilities.  Which is to be expected from every person and company in the United States.  The problem is we have a Congress and Executive Branch that continue to spend money while lowering taxes.  That must change and change now.  Remember the old axiom “When do you fix the roof?  Before it starts to rain.”  My friends, look to the horizon and see the coming storm.  We need to fix our roof, we need to acknowledge we have a problem.

%d bloggers like this: