My last post is highly critical of the economist and New York Times columnist, Paul Krugman, for encouraging massive new deficit spending to stimulate our under-performing economy.
Debt and the slow growth of our economy are the two main topics of this blog which I have now been writing for almost four years. How to speed up growth is a complicated and highly charged political issue about which reasonable and well informed people can differ. However avoiding excessive debt is to me a moral issue whose resolution should not be that difficult, at least in a conceptual sense.
I have often used the above chart from the Congressional Budget Office to illustrate our debt problem because it clarifies the problem so vividly. Here are its main features:
- Our public debt (on which we pay interest), now about $13 trillion, is 75% of GDP, the highest since right after the end of WWII. And it is projected to keep getting steadily worse under current policy.
- Note the decline in the debt from the end of WWII until about 1980. This doesn’t mean that the debt was actually paid off but rather that it shrank as a percentage of GDP as the economy grew fairly rapidly during this time period.
- From 1980 – 2008 the debt level fluctuated and increased somewhat but did not get badly out of control.
- Debt shot up rapidly with the Great Recession and has been continuing to grow ever since.
- The current GDP of our economy is about $19 trillion. At a current growth rate of 2.1%, this adds $400 billion of GDP per year. This means that a $400 billion deficit for 2016 would stabilize the public debt at 75% of GDP. But our 2016-2017 deficit is projected to be almost $600 billion (and rising). This is not good enough!
Conclusion. In order to begin to shrink the size of the public debt, it is imperative that annual spending deficits be reduced to well below $400 billion per year. This will be difficult for our political process to achieve but it is the only way to avoid a new and much worse financial crisis in the relatively near future.
It Does Not Add Up 
Mr. Heidel:
Maybe you could use some of these questions or topics for future posts if you haven’t already?
What are the pros/cons of paying down the debt instead of letting it increase in line with GDP?
I remember at the end of Clinton’s term, we had a budget surplus for one or two years and the market seemed to react negatively with fears of deflation.
There were a couple economists at the start of the great recession that described how efficient the economy was, like tight guitar strings with no slack, so that any recession or change in demand was immediately felt at production. We see that business investment is falling off but maybe that is because they can meet foreseeable demand with current factories?
I also am concerned about consumption and waste/pollution – plastic in oceans getting into the food chain, CO2 affecting climate with animals not adapting quickly enough so that we are in the 6th? great extinction. Is there a non debt based economy, or conservation/conserve (vs consumption encouraged) economy that we can transition to?
I am a financial conservative, but have lost faith in the business community and financial sector because of the obscene multiples of pay for upper management vs worker pay. Government is not efficient but there needs to be a counter weight to multinationals and the concentration of wealth. Service and products loose value when they are given to people so a monetary incentive is needed, but the current capitalist model trajectory is not sustainable.
This is why I disagree with your desire to replicate post WWII production increases and growth. The context has changed since we are not having to rebuild from the destruction and disruption of WWII. The continued push for people to consume and take on debt makes one a slave to debt.
Thank you.
Thanks for your very thoughtful comments. I will have to think about them carefully in order to respond intelligently. Your second paragraph suggests “stabilizing” the debt, i.e keeping it at a more or less constant percentage of GDP as opposed to trying to reduce it. This would mean holding deficits down to about $500 billion or so going forward, to maintain the debt at its current level of 75%. We’re not quite doing this now but it could be accomplished without too much strain if there were a bipartisan consensus for it. The problem is that this allows little room for error when our next crisis, recession, etc. of any kind occurs. For this reason it is much better to have debt on a downward path most of the time, with occasional emergency interruptions, when necessary.
More later!