The "greatest deliberative body in the world" doesn't deliberate very well or very often.
The Power of 3rd Grade Arithmetic
Preface. I took up the study of economics, not from a deep desire to wrap myself in the “dismal science” of unraveling how the economy works, rather because my circumstances at the time did not allow me to pursue my first choices in physics or astronomy. Many of my colleagues back then shunned economics as being “too difficult.” That was the simple challenge that propelled me into the dismal fray. I studied statistics and econometrics until those subjects were pouring out of my ears. Eventually, I realized that 3rd grade arithmetic was a better way to explain most of it.
Few facts are as powerful as those that rely on simple arithmetic—addition, subtraction, multiplication, and division. They’re understandable by almost everyone. They easily trump clumsy guesses, silly hunches, outright lies, and phony assertions—the favorite techniques of those who cannot or will not use their brains to reach reasonable conclusions that are obvious to those who can think. In this essay we will see how simple arithmetic can illuminate at least one of our most discussed economic issues: the public debt. The numbers, as you will see, speak with such clarity that only an ideologue could continue to deny them.
Recently, Nobel -winning economist Paul Krugman and our second richest citizen, Warren Buffett, observed that our public debt really wasn’t as “crushing” or as serious as many lesser intelligent observers would like us to believe. They both noted that our debt-to-GDP ratio was higher following WWII, and we managed our way out of that debt without resorting to heroic measures. They were both correct. By 1970 both our debt and debt-to-GDP ratio fell to very low levels. What happened to bring them down?
Very little, actually. We simply grew our way out of debt, averaging 3.9 percent per year in real (after inflation) GDP growth. And we did it in spite of the Korean War and the Vietnam War. And we did it in spite of the fact that our top federal income tax bracket ranged from 70 to 91 percent. We also added Medicare to our list of national expenses in 1965. But from 1970 onward, our GDP growth rate fell to an average of 2.8 percent per year, while our public debt began to grow until it reached its present level of $11.7 trillion.
Note: I have appended all the data at the end of this essay so as not to clutter up
these simple facts with too many numbers too early.
How much did a 1.1 percent annual reduction in real GDP growth affect our economy over that 42-year time span? It cost us $120 trillion dollars in GDP growth. Moreover, that $120 trillion in additional GDP would have generated an additional stream of revenue to the U.S. Treasury of $24 trillion in tax revenues. And that sum would have been sufficient to have paid off the public debt, to have extended the future of Social Security and Medicare indefinitely into the future, and to have rebuilt our decaying infrastructure of highways, bridges, railways, airports and sea ports to a level that would have been the envy of the world.
Yes, but…might we have spent that money on other ventures? Yes. We might have spent that money in a thousand different ways. My point, however, is first to show that the painless and effective way out of our debt “crisis” is to grow the economy at a slightly higher rate; and second, that spending cuts now will prevent us from growing the economy to achieve that goal. Moreover, complex econometric equations support both conclusions, and so does 3rd grade arithmetic.
Ok, now let’s look at why our GDP fell by an average of 1.1 percent. A partial explanation is that the economy averaged 3.9 percent per year under Democratic administrations, and just 2.6 percent under Republican administrations over that total time period (both averages are weighted). That difference accounts for more than the 1.1 percent differential, but it is not very revealing as to specific programs that helped or impeded growth. Still, it is an interesting observation that is neither readily apparent to most analysts, nor has it been examined by any of them to my knowledge.
I will depart from my 3rd grade arithmetic and shift to econometrics to reveal which aspects of our economy have contributed most to our debt since 1980. That time period also accounts for more than 90 percent of our public debt. Time and space constraints will not permit me to show all the calculations. Nevertheless multiple regression analysis supports this conclusion: three major factors contributed to more than 90 percent of our debt. They are (1) increases in defense spending, (2) growing trade deficits, and (3) several cuts in the top federal income tax bracket. All of those changes occurred under Republican administrations.
In contrast, all three factors fell during the Clinton administration, a period that saw about 4 percent in real GDP growth, and 4 consecutive budget surpluses. A fourth factor that was in place during his administration was the “Pay Go” feature to all spending bills. All money bills needed to show where the money was coming from before it could be sent forward.
Summary. Our Congress is now deadlocked in “debate” about the severity of the public debt, its cause, and its cure. The numbers and the four basic operations of them show us that they occurred under Republican administrations from large increases in defense spending, huge trade deficits, and too many tax cuts to those in the top tax bracket, along with a repeal of Pay Go. The logic that flows from these revelations argues for a lowering of defense spending (now underway), restoring the top tax bracket (done), and a reduction of the trade deficit (also underway), and restoring Pay Go. The economy is currently growing at about 2.2 percent real growth rate, thus we need to defer more spending cuts until we reach and sustain a 4 percent real GDP growth rate.
The Republican solution to lowering the public debt consists mainly in seeking cuts in Social Security and Medicare, two programs that are funded via payroll taxes and that have not contributed one penny to the public debt. Indeed, we could eliminate both programs and the public debt would remain at its present level and would continue to grow at its present rate.
Given the level of analytical incompetence that persists across a wide swath of Congress, and in their propensity to engage in protracted military operations around the world, and in their further inability to address the fundamental issues that have accounted for our trade deficit, and in their wasted efforts in arguing over a debt ceiling that they alone have caused, it is my further conclusion that they cannot rise up to the level of mental acuity needed to resolve the real issue, namely taking actions to grow the economy. Perhaps they should be replaced by real 3rd graders.
Calculations:
| Date |
RGDP |
% |
times |
Additional |
| in $Bil |
Change |
1.08% |
RGDP |
Dems |
Repubs |
| 1947-01-01 |
$ 1,774.60 |
| 1948-01-01 |
$ 1,852.70 |
4.40% |
| 1949-01-01 |
$ 1,843.10 |
-0.52% |
| 1950-01-01 |
$ 2,004.30 |
8.75% |
| 1951-01-01 |
$ 2,159.30 |
7.73% |
| 1952-01-01 |
$ 2,242.00 |
3.83% |
4.84% |
| 1953-01-01 |
$ 2,345.30 |
4.61% |
| 1954-01-01 |
$ 2,330.40 |
-0.64% |
| 1955-01-01 |
$ 2,498.20 |
7.20% |
| 1956-01-01 |
$ 2,547.60 |
1.98% |
| 1957-01-01 |
$ 2,598.80 |
2.01% |
| 1958-01-01 |
$ 2,575.40 |
-0.90% |
| 1959-01-01 |
$ 2,760.10 |
7.17% |
| 1960-01-01 |
$ 2,828.50 |
2.48% |
3.08% |
| 1961-01-01 |
$ 2,894.40 |
2.33% |
| 1962-01-01 |
$ 3,069.80 |
6.06% |
| 1963-01-01 |
$ 3,204.00 |
4.37% |
| 1964-01-01 |
$ 3,389.40 |
5.79% |
| 1965-01-01 |
$ 3,607.10 |
6.42% |
| 1966-01-01 |
$ 3,842.10 |
6.51% |
| 1967-01-01 |
$ 3,939.20 |
2.53% |
| 1968-01-01 |
$ 4,129.90 |
4.84% |
| 1969-01-01 |
$ 4,258.20 |
3.11% |
4.66% |
| 1970-01-01 |
$ 4,266.30 |
0.19% |
| 1971-01-01 |
$ 4,409.50 |
3.36% |
$ 4,493.15 |
$ 83.65 |
$ 16.73 |
| 1972-01-01 |
$ 4,643.80 |
5.31% |
$ 4,780.85 |
$ 137.05 |
$ 27.41 |
| 1973-01-01 |
$ 4,912.80 |
5.79% |
$ 5,109.89 |
$ 197.09 |
$ 39.42 |
| 1974-01-01 |
$ 4,885.80 |
-0.55% |
$ 5,137.49 |
$ 251.69 |
$ 50.34 |
| 1975-01-01 |
$ 4,875.40 |
-0.21% |
$ 5,182.54 |
$ 307.14 |
$ 61.43 |
| 1976-01-01 |
$ 5,136.90 |
5.36% |
$ 5,516.99 |
$ 380.09 |
$ 76.02 |
2.78% |
| 1977-01-01 |
$ 5,373.10 |
4.60% |
$ 5,830.78 |
$ 457.68 |
$ 91.54 |
| 1978-01-01 |
$ 5,672.80 |
5.58% |
$ 6,219.55 |
$ 546.75 |
$ 109.35 |
| 1979-01-01 |
$ 5,850.10 |
3.13% |
$ 6,481.71 |
$ 631.61 |
$ 126.32 |
| 1980-01-01 |
$ 5,834.00 |
-0.28% |
$ 6,534.50 |
$ 700.50 |
$ 140.10 |
| 1981-01-01 |
$ 5,982.10 |
2.54% |
$ 6,771.59 |
$ 789.49 |
$ 157.90 |
3.11% |
| 1982-01-01 |
$ 5,865.90 |
-1.94% |
$ 6,713.85 |
$ 847.95 |
$ 169.59 |
| 1983-01-01 |
$ 6,130.90 |
4.52% |
$ 7,090.31 |
$ 959.41 |
$ 191.88 |
| 1984-01-01 |
$ 6,571.50 |
7.19% |
$ 7,677.13 |
$ 1,105.63 |
$ 221.13 |
| 1985-01-01 |
$ 6,843.40 |
4.14% |
$ 8,078.43 |
$ 1,235.03 |
$ 247.01 |
| 1986-01-01 |
$ 7,080.50 |
3.46% |
$ 8,446.35 |
$ 1,365.85 |
$ 273.17 |
| 1987-01-01 |
$ 7,307.10 |
3.20% |
$ 8,808.70 |
$ 1,501.60 |
$ 300.32 |
| 1988-01-01 |
$ 7,607.40 |
4.11% |
$ 9,266.70 |
$ 1,659.30 |
$ 331.86 |
| 1989-01-01 |
$ 7,879.20 |
3.57% |
$ 9,698.77 |
$ 1,819.57 |
$ 363.91 |
| 1990-01-01 |
$ 8,027.00 |
1.88% |
$ 9,986.38 |
$ 1,959.38 |
$ 391.88 |
| 1991-01-01 |
$ 8,008.30 |
-0.23% |
$ 10,071.94 |
$ 2,063.64 |
$ 412.73 |
| 1992-01-01 |
$ 8,280.00 |
3.39% |
$ 10,523.41 |
$ 2,243.41 |
$ 448.68 |
| 1993-01-01 |
$ 8,516.20 |
2.85% |
$ 10,938.28 |
$ 2,422.08 |
$ 484.42 |
3.01% |
| 1994-01-01 |
$ 8,863.10 |
4.07% |
$ 11,503.04 |
$ 2,639.94 |
$ 527.99 |
| 1995-01-01 |
$ 9,086.00 |
2.51% |
$ 11,917.68 |
$ 2,831.68 |
$ 566.34 |
| 1996-01-01 |
$ 9,425.90 |
3.74% |
$ 12,493.37 |
$ 3,067.47 |
$ 613.49 |
| 1997-01-01 |
$ 9,845.90 |
4.46% |
$ 13,186.19 |
$ 3,340.29 |
$ 668.06 |
| 1998-01-01 |
$ 10,274.80 |
4.36% |
$ 13,904.29 |
$ 3,629.49 |
$ 725.90 |
| 1999-01-01 |
$ 10,770.60 |
4.83% |
$ 14,726.74 |
$ 3,956.14 |
$ 791.23 |
| 2000-01-01 |
$ 11,216.40 |
4.14% |
$ 15,496.77 |
$ 4,280.37 |
$ 856.07 |
| 2001-01-01 |
$ 11,337.50 |
1.08% |
$ 15,832.95 |
$ 4,495.45 |
$ 899.09 |
3.65% |
| 2002-01-01 |
$ 11,543.10 |
1.81% |
$ 16,292.61 |
$ 4,749.51 |
$ 949.90 |
| 2003-01-01 |
$ 11,836.40 |
2.54% |
$ 16,884.13 |
$ 5,047.73 |
$ 1,009.55 |
| 2004-01-01 |
$ 12,246.90 |
3.47% |
$ 17,653.67 |
$ 5,406.77 |
$ 1,081.35 |
| 2005-01-01 |
$ 12,623.00 |
3.07% |
$ 18,388.19 |
$ 5,765.19 |
$ 1,153.04 |
| 2006-01-01 |
$ 12,958.50 |
2.66% |
$ 19,077.29 |
$ 6,118.79 |
$ 1,223.76 |
| 2007-01-01 |
$ 13,206.40 |
1.91% |
$ 19,650.13 |
$ 6,443.73 |
$ 1,288.75 |
| 2008-01-01 |
$ 13,161.90 |
-0.34% |
$ 19,798.05 |
$ 6,636.15 |
$ 1,327.23 |
| 2009-01-01 |
$ 12,758.00 |
-3.07% |
$ 19,406.24 |
$ 6,648.24 |
$ 1,329.65 |
1.51% |
| 2010-01-01 |
$ 13,063.00 |
2.39% |
$ 20,081.65 |
$ 7,018.65 |
$ 1,403.73 |
| 2011-01-01 |
$ 13,299.10 |
1.81% |
$ 20,663.43 |
$ 7,364.33 |
$ 1,472.87 |
| 2012-01-01 |
$ 13,601.85 |
2.28% |
$ 21,359.00 |
$ 7,757.15 |
$ 1,551.43 |
2.16% |
| 2013-01-01 |
| $ 366,812.05 |
$ 1.18 |
$487,674.72 |
$120,862.67 |
$24,172.53 |
3.68% |
2.59% |
|
Ron