US Debt and the Republicans and the Democrats

I think there is a belief out there that the Republicans are good with and know what to do with the economy and that Democrats are not.  Certainly, one of Romney’s attacks on Obama consists of putting up debt statistics.  Below, I have plotted the United States Gross National and Public Debts as a proportion of Gross Domestic Product for the years 1940 to 2011.  The data are for the close of the fiscal year.  Gross Public Debt is government debt owned by the public.  Gross National Debt includes both Gross Public Debt and intra-governmental debt.  Intra-government debt is debt owed within the government.  For example, the largest portion of intra-governmental debt is the Social Security Trust Fund.  At this point in time and for many years previously, the amount of Social Security taxes taken in during a year has been greater than the amount spent on Social Security benefits.  The surplus is invested in the safest investment out there, United States securities.  However, then the government owes the government the Social Security money invested.  The surplus Social Security money is spent by the government as the government would spend any other money that the government borrows.

The debts are plotted as a proportion of the Gross Domestic Product, which is the sum of all goods and services produced by the country in a given fiscal year.  Gross Domestic Product is then a measure of the size of the domestic economy. The data for the Gross National and Public Debts can be found at http://www.whitehouse.gov/omb/budget/Historicals, Table 7.1.  The data for the Gross Domestic Product (and Gross Domestic Product deflaters) can be found at the same location in Table 10.1.

Gross National and Public Debt as a proportion of Gross Domestic Product

Coming off of World War II, the country was in a lot of debt.  However, probably because the United States was the engine of world growth after World War II, the United States economy grew rapidly and debt as a proportion of Gross Domestic Product declined quite steadily until around 1974 and 1975.  The years from 1947 to 1974 were the years of Eisenhower, Nixon, and Ford (Republicans – about 14 years in office) and the years of Truman, Kennedy, and Johnson (Democrats – about 14 years in office).  During Ford’s (Republican – 1974 to 1977) presidency, there was a slight up tick.  During Carter’s (Democrat – 1977 to 1981) presidency, debt as a proportion of Gross Domestic Product decreased a small amount.   In 1981, at the beginning of Reagan’s (Republican – 1981 to 1989) presidency, debt started climbing again, and climbed or stayed level during Reagan’s years,  during the H. W. Bush (Republican – 1989 to 1993) presidency, and during the beginning of Clinton’s (Democrat – 1993 to 2001) presidency.   In 1995, under Clinton, the debt fell, until 2000, at which point the debt leveled off.  With the W. Bush (Republican – 2001 to 2009) presidency, debt began growing again, then leveled off.  During Obama’s (Democrat – 2001 to present) presidency, there has been a steep increase in debt. In the 1980’s, Republicans, under Reagan, put us on a course of increased deficit spending to spur growth, a Keynesian principle.  Clinton, a Democrat, was the only president since Nixon to seriously decrease the debt.

In the next plot, I have plotted per capita real Gross Domestic Product against fiscal year.  The nominal (the actual dollar amount at the time the measurement was made) Gross Domestic Product was divided by a Gross Domestic Product deflater to give the Gross Domestic Product in 2005 dollars – that is the size of the deflated Gross Domestic Product was adjusted for inflation and is comparable between years.  I also divided the Gross Domestic Product in 2005 dollars by the size of the United States population each year, to give a per capita measure.  Since, as time has gone on, both due to the baby boom and to more families having two wage earners and fewer children, the proportion of wage earners to the overall population has increased, some of the increase in Gross Domestic Product should be due to a larger proportion of wage earners in the population.  The data for the population can be found at http://www.census.gov/popest/, from a number of tables.

Per Capita Real Gross Domestic Product in 2005 dollars - fiscal year 1940 to 2011

We see per capita real Gross Domestic Product increasing during World War II, then decreasing and leveling off after the war.  By Eisenhower’s election, per capita real Gross Domestic Product was back to the peak level of World War II.   Democrats (Roosevelt and Truman – 1933 to 1953) were in power during the 1940’s and up to 1953.  During Eisenhower’s eight years in power (1953 to 1961), per capita real Gross Domestic Product mainly grew, but slowly.  During the years of Kennedy and Johnson (1961 to 1969) growth was quite steep.  During the years of Nixon and Ford (1969 to 1977), there was slow growth, then quicker growth, then a decrease.  During Carter’s years (1977 to 1981) there was steep growth that leveled off in 1979.  During Reagan’s years (1981 to 1989), per capita real Gross Domestic Product was flat until 1984, then grew steeply for the rest of Reagan’s terms.  Under H. W. Bush  (in power from 1989 to 1993), the steep growth continued until 1990, then the growth went flat.  During Clinton’s years in control (1993 to 2001), there was steady steep growth.  During W. Bush’s time in power (2001 to 2009), growth went flat for the first four years, then there was a steep increase to 2008.  There was a steep drop between 2008 and 2009, straddling the W. Bush and the Obama presidencies.  Since 2009, during Obama’s presidency (2009 to present), there has been growth.

The next two plots show total federal receipts, per capita and as a portion of Gross Domestic Product.  Total federal receipts include all federal taxes (personal and corporate income, retirement, medical, and excise) plus any other income.  The first plot, the per capita plot, shows receipts increasing into and through World War II, then decreasing until 1950.  These were Democratic years.  During the last two years of Truman’s administration, per capita federal receipts rose again. During Eisenhower’s years (1953 to 1961), per capita federal receipts stayed essentially flat. During the Kennedy and Johnson years (1961 to 1969) and into Nixon’s administration (1969 to 1974) per capita federal receipts rose.  From 1969 to 1976 – during Nixon’s and Ford’s administrations, per capita federal receipts fell, then rose, then fell, and ended up about at the 1970 level.  During Carter’s administration (1977 to 1981) per capita federal receipts rose.  In Reagan’s administration (1981 to 1989), there was a drop from 1981 to 1983.  From 1984 to 1989 (into H. W. Bush’s administration), per capita federal receipts rose.  During the rest of H. W. Bush’s administration (1989 to 1993), per capita federal receipts fell.  When Clinton was president (1993 to 2001), from 1993 onward, per capita federal receipts increased steeply.  Under W. Bush (2001 to 2009) per capita federal receipts fell steeply from 2000 to 2003, then rose steeply from 2003 to 2006, then fell into 2008.  Under Obama (2009 to present), per capita federal receipts have risen just slightly.  The 2011 level was at about the 1995 level.  The data for federal receipts can be found at http://www.whitehouse.gov/omb/budget/Historicals, Table 2.1.

Per Capita Real Federal Receipts in 2005 dollars - fiscal years 1940 to 2011

Federal Receipts as a proportion of Gross Domestic Product

The plot of federal receipts as a proportion of Gross Domestic Product is probably a better measure of the cost of the federal government.  Per capita measures are influenced by family size and the number of wage earners in the population.  One would expect larger per capita revenues with smaller families and more wage earners.  The plot of federal receipts as a proportion of Gross Domestic Product is remarkably flat.  From about 1953 to about 1996, federal receipts were about 17% or 18% of Gross Domestic Product.  There were peaks at about 20% in the years 1969, 1981, and 1997 to 1999.  Federal receipts as a proportion of Gross Domestic Product fell during the beginning of W. Bush’s presidency, then grew back to the 17% to 18% level and then fell for the second half of the W. Bush presidency.  Since 2009, federal receipts as a proportion of Gross National Product have been flat, at a level not seen since 1949, about 15%.

With regard to debt, since 1980 the United State’s administrations have been mainly Republican and the Republican administrations have overseen steady increases in the debt.  Clinton, a Democrat, got debt under control some way into his presidency.  Obama, also a Democrat, faced with a severe economic crash, has sharply increased the debt.  Before 1980, back to World War II, debt was mainly decreasing – under both Democratic and Republican presidencies.

We see that there has been good growth under both Democratic and Republican presidents, more often during Democratic administrations.  With regard to per capita federal receipts, receipts have tended to be larger during Democratic administrations (partly, I would think, due to the faster growing Gross Domestic Product).  Federal receipts as a proportion of Gross Domestic Product have tended to be about the same under presidents of either party.  That said, under both W. Bush and Obama, receipts have been historically low – yet the economy is struggling.

Just for information, I have plotted the size of the United States population from 1940 to 2011.  The bump around 2000 is probably due to a change in which segments of the population that are included.

US population 1940 to 2011

The most successful president since 1981, when debt as a proportion of Gross Domestic Product began consistently to trend up, was Clinton – in the second half of Clinton’s first term.  Clinton grew the economy while decreasing the Gross National and Public Debts.  Reagan, H. W. Bush, and W. Bush were not able to, and Obama has not been able to, both grow the economy and decrease debt.  Clinton did see federal government receipts as a portion of Gross Domestic Product increase above historical rates.

There are many factors that affect the economy other than whom the president is.  World War II greatly increased debt and spending.  I read somewhere that, after the war, Truman ‘printed money’ to pay for government, that is, the government spent more money than the government took in or borrowed.  Eventually, since inflation was increasing, the government ‘printed’ less money.  Having to pay for wars (Vietnam, Iraq, Afghanistan) has affected and affects the economy.  The 9/11 attacks affected the economy.  Shocks in the price of oil and the price of gasoline affect the economy.  Natural disasters affect the economy.  Environmental disasters affect the economy.  Different types of investment bubbles affect the economy.  Foreign economic difficulties and successes affect the United States economy.

Personally, I think the crash that occurred at the end of the W. Bush administration was caused by the masses of baby boomer’s approaching retirement and pouring so much money into the stock and housing markets that the markets could not absorb the money and crashed – essentially wiping out much of the money.  The slow growth of the economy since then is probably a result of the indebtedness of the persons in this country.  At http://www.federalreserve.gov/releases/g19/current/default.htm, the consumer debt in our economy since 2007 is reported.  The people of our country have owed about 2.5 trillion dollars in consumer debt in the years 2007 to 2012.  Our Gross Domestic Product was 13.861 trillion dollars in 2007 and 14.959 trillion dollars in 2011.  Debt has been at about the same level over the 6 years, also a decreasing bit under 20% of Gross Domestic Product.

I have been reading in the papers and hearing on television that the big companies of our nation have a lot of money, but are not spending the money, ostensibly because the leadership within the companies do not think that there are markets for the companies’ goods and services.  I think that when President Obama said, as we are being reminded of every day here in Iowa, that the private sector is doing fine, the president was referring to the big companies that are sitting on hoards  of money.  Obviously, much of the economy of the country is not doing fine.

When considering income, the plot of per capita Gross Domestic Product in 2005 dollars does not tell the full story.  While, currently, the economy appears to be growing at a rate of growth that we saw during the first few years of the second W. Bush term, from what I have read in the newspapers and seen on television, the growth in income from the growth in the economy is mostly going to the very rich.  For most of us, income is stagnant or decreasing.  In concurrence, my plots of the diverging incomes by percentile and median income by gender a few blogs back show a country where share of income is becoming increasingly skewed, with the peak to the right and the tail to the left.  As was written in an op-ed in the newspaper we read in our household, the wealthy do not spend as much of their income as those whose incomes are smaller and who need to spend their income just to live.   Money that is not spent is invested and I do not think such money produces much more than financial services.  Also, the incomes of men have been on a roller-coaster since the late 1960’s and, on average, over the period from the late 1960’s to now, median male income has not changed much in real dollars.

Obama inherited the economic crash from W. Bush.  Bush had cut federal receipts.  Obama cut federal receipts even more.  The economists I have been reading and listening to have been saying that Obama pulled us back from an economic depression through the president’s stimulus package. As an aside, according to an article in  The Economist and from other places, cutting government spending late in the Depression caused a contraction in the fragile economy and such a policy might have the same effect now.

The government has two types of policies to manage the economy, those that manipulate the price of money to stimulate or control growth and those that pour money into the economy to stimulate growth.  At the time Obama took over (and since then) interest rates were (and are) very low, so the price of money is very low – which is what one wants to stimulate an economy.  Since interest rates are low, there has been little leeway to use monetary policy (manipulating the price of money).  The Federal Reserve Banks are responsible for monetary policy – even though interest rates are low, the  Fed has been doing Quantitative Easing to decrease the price of money and increase the money supply.  Congress and the president are responsible for fiscal policy (pouring money into the economy to stimulate growth). As I wrote above, the debt that Congress and Obama have incurred with the stimulus package most likely saved us from going into a depression.  One of the main problems associated with large government debt is the tendency of government debt to crowd out private debt.  The result should be higher interest rates, which have not been seen at this point, so, maybe, at this point we do not need to worry so much about public debt.

I think that the processes that lead to diverging incomes and economic bubbles are natural.  There is no one to blame for the processes.  Baby boomer’s need to put the boomer’s savings somewhere.  Perhaps putting money in banks would be better, because banks (at least used to) use saved money better in terms of investing in the economy.  Years ago, I had a theory that, when energy shocks occur, the displacement of income causes inflation and that when inflation occurs, the adjustment of a person to inflation would depend on the amount of control a person has over their income.  I would think that control over income is positively correlated with income.  The result of such a process would be diverging incomes over time, as a result of economic shocks.  I tried looking at the hypothesis when I wrote a creative component in 1985 for my master’s degree at Iowa State University.  I have not revisited the problem since, mainly due to illness and discouragement.  But, if my theory is correct, the process is natural – not anyone’s fault.   As a country, we need to deal with the two processes in a realistic, nonpartisan way.  We, also, need to give economists  the respect for the economists’ knowledge that economists deserve.  I think, for what answers are out there, that economists have the answers, not politicians.



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