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Reagan, Bush, and the National Debt: How They Increased it to Unheard-of Levels

2015-08-12

Ronald Reagan campaigned partly on the assertions that the national debt was “the highest ever” and “out of control.”  The national debt at the time he was elected was about 33% of the gross domestic product (GDP); this was the lowest proportion of GDP in 50 years, and could only be described truthfully as “the highest ever” if one ignored inflation and the relationship of debt to GDP.  The national debt was not “out of control” until he got his hands on it.  He presided over a nearly 190% increase in the national debt as a proportion of GDP, from approximately $1 trillion to $2.9 trillion.

Reagan performed this magic by dramatically reducing taxes on the wealthy in his first year in office.  The deficit increased so rapidly that he was forced to slightly scale back his tax reductions later.  His excuse for this maneuver was the notion that cutting taxes on the wealthy would inspire them to increase their income so greatly that total tax collections would actually increase.  There was no sane precedent for this notion, and George HW Bush famously called it “voodoo economics” when he campaigned against Reagan (before he was selected as the vice presidential candidate.)

The notion that lowering taxes would increase tax receipts was based on the idea that the wealthy would work harder and produce more income if a larger percentage of their income was left to them after taxes.  This is known as the “Laffer curve.”  The notion that if you tax the wealthy too much, they will “goof off” (not work as hard), is essentially this: why bother to work as hard when you only get to keep 50% of your income after taxes than when you get to keep 85% of your income after taxes?  The problem is that the wealthy are struggling to spend even a fraction of the money they are getting, and usually add the surplus to their savings or brokerage accounts.

Before Reagan, the national debt had been dramatically increased during WW II to allow for arming the rest of the free world and the Soviet Union against Nazi Germany and the Japanese Empire.  At the end of the war, the national debt was 120% of the GDP.  After the war, a booming economy and relatively high taxes allowed us to pay down the debt while at the same time increasing our GDP steadily.  Before the war, our economy had been in the doldrums and had not recovered from the Great Depression.  Deficit spending, on disposable items like bombs and bullets, primed maximum employment and increasing wages, with notable prosperity as a result.

Reagan’s deficit spending, by contrast to WW II spending, had only marginal beneficial effects on the economy.  This was because the deficit was created by tax cuts that resulted in a loss of government revenue rather than spending on tangible items which transferred revenue to the producers of those items.  After Reagan, GHW Bush continued the deficit spending by not raising taxes to previous levels; in his single term, the first Bush increased the deficit a further 54%, from $2.9 trillion to $4 trillion.  The economy continued to function marginally, and income inequality increased.

The next president, Clinton, took a different tack: he raised taxes and tried to balance the budget.  The total national debt increased 41% during his two terms.  By the end of his second term, the budget was nearly balanced.  If he had not had to pay interest on the new debt, it is estimated that he would have paid off all of the remaining debt from WW II; he paid about $2.2 trillion in interest on the debt accrued from before he assumed office.

The second President Bush increased the national debt by a further 72%, primarily by cutting taxes and pursuing an off-the-books war in Iraq.  He was also forced to pay some $800 billion to bail out the banks after the crash of 2007-8.  During his first campaign for office, he promised to “retire nearly $1 trillion in debt over the next four years.  This will be the largest debt reduction achieved by any nation at any time…”  He increased the debt by at least $6.1 trillion, starting in his first year in office.  Much of the increase in debt was interest paid on the previous deficits.

When Obama took office, he inherited an economy in free fall and a nearly $1 trillion yearly deficit.  This shortfall has been dramatically reduced, year by year, and is now estimated at $400 billion a year.  At the same time, jobs have increased every month since 2010, and the unemployment rate has decreased to below 6%.  Unfortunately, part of this percentage decrease has been a result of people dropping out of the workforce, despairing of finding work.  During his terms in office so far, Obama has increased the national debt by 23%.  The debt now represents between  72 and 80% of GDP, depending on how the terms are defined and whose figures you use (see Wikipedia.)

The inescapable conclusion is that Republican contenders for presidential office will lie to get elected (not that Democrats are necessarily any more truthful.)  We must also conclude that the Republican policy of reducing taxes results in deficit spending which does not stimulate the economy, in contrast to deficit spending that is used to produce something (even if that something is blown up or scrapped.)

Thus, we see that, in order to stimulate the economy and improve prosperity (meaning growing incomes and improving income equality), it is necessary to 1) raise taxes on the wealthy and 2) spend some of the money on producing something rather than just paying down the debt.  The obvious thing to produce (or repair) is, based on observation, infrastructure like roads and bridges.

Most of the information in this post was taken from a site called http://zfacts.com/ which has a segment on debt as a percent of GDP: http://zfacts.com/p/318.html as well as a lot of other material I haven’t dived into just yet.

 

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