Debt and Deficit part deux

Debt and Deficit 101

(part deux)

       I wrote a lot (too much?) in part one regarding the nature and origins of the national debt, mentioning deficit along the way. In many ways the burgeoning budget deficits of the last 50 years (Clinton’s last 4 years being notable exceptions) have put the nation in much the same position as the individual who uses a credit card to charge the expenses incurred over and above their income. I used to caution students about debt using the example of simply paying the monthly minimum (interest plus a very small amount on principal). A $2,000 credit balance with an 18% annual rate, with a minimum payment of 2% of the balance, or $10, whichever is greater, would take 370 months or just over 30 years to pay off! And this assumes no new charges.

        Now consider how this differs from the national debt and deficit:

First: The amount of interest on the national debt, while nowhere near the 18% APR figure in the example, is considerable. The federal debt at the end of the 2018/19 fiscal year (ended September 30, 2019) was $22.7 trillion. Interest alone, (no debt reduction at all) was about $404 billion! That sum consumed 11.5% of the federal budget in 2019. This is equivalent to a family planning a budget with the understanding that 11.5% of their income will be unavailable because of debt service. Before you say it, no it isn’t “just like a mortgage,” because there is a tangible asset at the end of the mortgage tunnel.

       Adding to the debt figure by borrowing to cover spending which exceeds income (deficit) has the obvious effect of increasing the debt service (interest) for the next budget, and so it goes. There is no real humane alternative to deficits in emergencies such as CoVid, war or recession. Of course, there are options which can avoid war (Iraq, VietNam), but even with un-necessary wars (as a talking point) from 1950 to 1965 the total debt increase was “only” $40 billion.

        When discussing deficits, while there is no “one size fits all” answer, explanation or avoidance, there are some obvious things which can be done to reduce them, which I’ll cover shortly. Likewise, Political Party has had some, limited influence on the inception and recovery of several of these.

        Obviously, no economy can handle the cost of a world war, world-wide depression, or global pandemic out of pocket. Deficits in these cases are predictable and understandable. Avoidance, however, is in almost every case far simpler than recovery. Without going into a great deal more detail, I would offer that both of the great economic disasters of the past 100 years resulted from the same root cause.

        Unregulated Free Market Capitalism, in the sense that inspired Karl Marx to rail against it, drove the insane stock market surge which culminated, in the crash of 1929 and the housing bubble collapse of 2008. Both also resulted in the necessity of the government spending money it didn’t have to avoid revolution it didn’t want (in the early 1930s), and national impoverishment in 2009-14. For more on the Great Depression (and a lot more dirt on some major commercial banks) I suggest “The Great Crash, 1929” by J.K Galbraith. If you remain insufficiently nauseated, then read (or view) “The Big Short” (book by Michael Lewis).   

          A final word on political systems. Free Market Capitalism with no (or limited) national conscience has caused or exacerbated about 20, or so, US Recessions in the 19^th, 20^th, and 21^st centuries. Worldwide the number is closer to 45. Both Republican Theodore Roosevelt and Democrat Woodrow Wilson stressed the importance of regulation of some aspects of the economy “in the public interest”. Safe drugs, Meat, and business competition vice monopoly are accepted today by the vast majority of us excluding, possibly John Stossell.

        The Great Depression triggered more regulatory legislation, especially in the area of banking and securities trading. The Glass Stegall banking act (1933) was an attempt to protect bank customers from the misuse of deposits by the banks. Later, Savings and Loans also got a dose of regulation following a $105 billion Federal bailout, with the Financial Institutions Reform, Recovery and Enforcement Act of 1989. Apparently pressed by commercial banking interests, Congress responded with the partial repeal of Glass Stegall in 1999, just in time for the 2007-13 abuse of investor funds leading to the housing bubble collapse.

         The resultant attempt to right the ship, as well as protect consumers, Dodd-Frank, was enacted only to see the Trump administration assail it currently. What has gone unmentioned in all this is the fact that commercial banks were and are doing just fine but wanted to do “finer.”  Senator Elizabeth Warren has summed it up thus:

“Federal regulators have concluded that five U.S. banks are large enough that any one of them could crash the economy again if they started to fail and were not bailed out.… There would have been no crisis without these giant banks. They encouraged reckless lending by gobbling up an endless stream of mortgages to securitize and by funding the slimy subprime lenders who peddled their miserable products to millions of American families. The giant banks spread that risk throughout the financial system by misleading investors about the quality of the mortgages in the securities they were offering.”

          This is why, while some scream and warn of “socialism,” the real issue is lack of conscience and/or regulation in a manner which benefits all of us equally, not necessarily in condition, but in access and opportunity on a level playing field.  I’ve spent so much time on this because so incredibly much deficit spending has resulted from those large financial concerns and their (mis)management. Some few of those responsible may have been somewhat disadvantaged but damned few, if any, have lost their homes or been forced to use food stamps due to their bad behavior. In fact, one is now Secretary of the Treasury.

        So, what could be done to limit or eliminate deficits? The next factoid will alarm some, but most will get it. The low sum total of federal deficits from 1950 to 1960 was $18 billion, which included the Korean war which, on balance, was the last “Just War” the US has fought. There is a common thread throughout this period. From 1950 to 1963 the average highest marginal income tax rate was 91%! Read it again. We hear frequent bitching re: high taxes, yet, the economy overall grew by 37% during the 1950s. At the end of the decade, the median American family had 30% more purchasing power than at the beginning. Inflation was minimal, in part because of   Republican President Eisenhower's efforts to balance the federal budget. Unemployment remained low, about 4.5%. There were three years of actual budget surpluses!

         During the 1960-70 span, marginal rates remained between 71.5% to 91%.  Through that span, the US engaged in the space race, fought an undeclared war in Southeast Asia, enacted Medicare and Medicaid, and financed a moon landing.

        During the 1970-1980 period, taxes remained in the 70% range but the war in Vietnam escalated, causing deficits to ramp up,  energy crises in the last half of the decade added to the misery and we experienced double digit billion deficits most years.  

        Enter Ronald Reagan. Within 2 years, highest marginal rates were cut to 50%, which was a 40% decrease on the highest taxed revenues. At the same time, defense spending was increased, and, predictably, deficits bloomed to several hundreds of billions annually from 1982 to 1990. Along the way, even facing deficits, the highest marginal tax rate was lowered even further, to 28 % in 1988, where three straight deficits of almost $300 billion resulted as tax revenues declined even further. 

        In 1992, the Clinton administration urged and managed to get (over significant Republican objection) a highest marginal rate increase back up to 39.6% which remained in effect until 2002. In 1994, the deficit dropped below $200 billion and to $22 billion in 1997. Then, in 1998, 99, 2000, and 2001 (all Clinton budgets) the combined budget surplus totaled more than half a trillion dollars. 

        With Bush 43 also came a war on a nation which had not attacked us and the return to deficits for 2002 to 2009. The 2009 budget, a Bush budget, saw the first Trillion dollar deficit, although Bush was as much victim as anything else, as the large commercial banks’ fiddling with dubious securities came home with a vengeance, and we heard the phrase “too big to fail” for the first time.  The resultant Troubled Asset Recovery Program (TARP) spiked the deficit to a new high, a 2010 Obama tax cut didn’t help matters any and we saw the nation’s economic woes, largely (again) brought on by rich folks fiddling with others people’s money, rise to four consecutive trillion dollar deficits.

        In 2013 the marginal tax rate was increased to 39.6%, and the deficit dropped back below $1 trillion. In 2014 and 15, the deficit decreased to less than 3 percent of GDP for the first time in six years when Obama left office. Since then, the Trump tax cut which reduced corporate tax rate from 35% to 21%, predictably resulted in a $1.5 trillion decrease in federal revenues. The modest, but temporary decrease in personal income tax was far more than offset by decreased corporate taxes. With a self-described “booming” economy, Trump has charted three straight years of large and increasing deficits approaching a trillion once more. Trump’s literal response to questions about these deficits and what would be the result was “Well, we won’t be here.” This, of course was before 2020 is added. Current OMB deficit prediction for this year is $3.7 trillion, with Covid impact a large part. 

        So here we are, with the lowest marginal tax rate since 1931 (except for the Reagan /Bush 41 fiasco of 28% for 1988,89, and 90) and deficits seem to be a permanent fixture even with the world’s greatest economy (just ask him). What drives them? what can be done?  Stay tuned.