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Edward Phillips

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About our Budget Deficits and our National Debt
by Edward Phillips   
Rated "G" by the Author.
Last edited: Saturday, September 08, 2012
Posted: Friday, September 07, 2012

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We haven’t yet pulled out of our latest recession, and we have a large budget deficit and a growing national debt. Which should come first: Reduce our debt and deficits, or restore our economy? The answer is critical because reducing our deficit calls for spending cuts at a time when the targeted programs are most needed. Conversely, restoring our economy requires that the government take the essential fiscal and monetary measures that first increases our debt, and afterward can reduce it. But restoring our economy also means that we will have the means with which to pay down our debt as well as reduce spending in many government programs. This essay shows that we must make restoration of economic growth our first priority.

About our Budget Deficits and our National Debt

Neither our budget deficit nor our national debt should be our #1 economic priority. As Nobel laureate Paul Krugman noted, our debt-to-GDP ratio was higher following WWII than it is today. Further, we did nothing heroic to bring our debt down to almost zero by 1970. We simply grew our economy at its normal long range growth rate. It is safe to say that Eisenhower, Kennedy, and Johnson were better stewards of our economy than many historians give them credit for being.
 
The problem with debt is whether we have the ability to pay the interest on it, and the means we choose by which to reduce it. The interest on our debt last year was $224 billion, or 6 percent of our total budget. That is not a frightening percentage.    Yes, we need to keep an eye on it, but restoring the economy is priority #1. A growing economy solves many issues including deficits, debt, unemployment, poverty, food stamps, consumer debt, health insurance needs, illiteracy, crime, suicides, and a host of other social issues.
 
Back to our debt: 94 percent of it piled up since 1980. There is no reason to guess about how or why it happened. Any econ undergraduate could easily isolate its sources via regression analysis. They are:    1) defense spending [63%]; 2) our trade deficits [17%]; and 3) the lowering of the top marginal income tax rate [14%]. Anyone who doesn’t agree with those factors or their percentages is free to run the analyses himself. As Bill Clinton put it “It’s just arithmetic.” 
 
In searching for ways to reduce both the budget deficit and our national debt, it makes sense to attack the factors that caused both of them: That means 1) cut defense spending, 2) reduce our trade deficit, and 3) raise our top marginal tax rate.  The Clinton years are a great model to study. He gave us four consecutive budget surpluses, got the trade deficit down to almost zero, cut defense spending, and had a top marginal tax rate of 39.6 percent. Our economy produced 23 million new jobs while the unemployment rate fell to 3.9 percent.  It was a climate that helped to produce many new millionaires.
 
Today, we need to: First, pass a targeted stimulus bill with funds for retraining the unemployed and to put a large number of unemployed back to work on infrastructure projects all across the country. We need to raise the top marginal tax back to its pre-2001 level, and restore the estate tax while eliminating ways to escape paying it. Trimming the trade deficit is a longer term matter that will require decisive action starting with China’s currency policy, with opening Japan’s markets, with a major reduction in our oil imports, with accelerating the development of new energy sources, and with a comprehensive review and revamping of our tax policy with a view toward its worldwide implications. 
 
Rather than looking for ways to cut Social Security or Medicare and breaking faith with those who rely on them, we need to extend their solvency by making slight increases in the tax rates, and by raising the income cap on salaries and wages. 
 
All of these issues are consistent with restoring and maintaining economic growth. In contrast, attacking debt before growth is putting the cart before the horse, while also putting the burden for debt reduction onto the backs of the poor and the middle class. These actions would literally decimate the economy and magnify all of our social ills many fold. 
 
These different solutions to solving economic issues are not in any way the logical outcome of different well-intentioned people reaching different conclusions from the same facts.  That is a false assertion that merely tries to cover up the facts and the analyses, while jumping to ideological “truths” that are without a foundation in fact or science.
 
Did I mention that today we have the most severely skewed wealth distribution curve in the world, while we simultaneously rank #1 in the world in murder rates, imprisonment rates, obesity rates, illiteracy rates, teen pregnancies, lack of social mobility, suicide rates, mental health issues, in illegal drug usage, and we rank about 27th in life expectancies? Widening the gap between those at the bottom and those at the top makes all these issues worse, not better.

 

 

 

 

 

 

 

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Reviewed by Ronald Hull
As usual, your analysis hits a home run. I'm a little worried about the chart ending in 2006, but your explanation that interest is only 6% of the budget is good enough for me.

Glad you are crunching the numbers. Nobody else, including me, is.

Ron
Reviewed by Robert Johnson
This is a very coherent article. Linking the causes of the debt and deficit to their solutions as one and the same makes a crystal clear argument that would seem hard to oppose. Using historical data and calculating debt interest as a ratio to GDP puts that in perspective.
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