A Longer-Run Look at the U.S. Debt

An article in the most recent Federal Reserve Bank of St. Louis REVIEW by Daniel Thornton offers a long-run perspective on the U.S. Deficit and Debt Problems. It is very interesting and sheds light on what has caused the increase in debt.  Several findings are of interest:
1.   For most of our history, federal debt was associated with war, and during the time after a war, the debt/GDP fell for a number of years.
2.  The exception is the increase in debt associated with the Great Depression, but the increase in debt was not that large.
3.  The increase in annual deficits began in the early 1970s.
4.  Tax revenues as a percent of GDP stayed relatively constant but federal expenditures as a percent of GDP increased.
5.  The increases in government spending are associated with increases in Social Security and Medicare/Medicaid, and other payments to individuals.  That is, to transfer payments.
6.  The two major sources of government revenue are the individual income taxd and social security taxes.
7.  The individual income tax revenue relative to GDP has not been greatly affected by changes in the highest marginal individual income tax rate.
8.  The average individual income tax rate paid by households based on income shows that the highest quintile pays an average income tax rate about four times higher than the lowest quintile.
9.  Since 1979, the lowest income-earners have benefited the most from all the tax law changes.

Different people are likely to draw different inferences from these "facts."  Those who believe that we have to have substantial redistribution will argue that the rise in expenditures is necessary and to close the deficit, more tax revenues need to be raised from the higher-income households.  Those who believe the size of government is too large, will call for reduced expenditures.  But any future plans should at least acknowledge that historical record.

Pieces from Today's Wall Street Journal

Several pieces in today's Wall Street Journal that are of interest.  The first is a long article on the Greek crisis.  I was in Germany two years ago to teach a short course on public policy. Greece was in the news so I included a part of the course on the Greek situation.  Last year I taught the course again and, once again, Greece was in the news so I discussed it again.  I will be there shortly and it appears Greece can be an illustratation again.  This article is likely to be one of the handouts for the class.

There are also two op-ed pieces.  The first looks at how President Roosevelt changed his policy in light of the war in Europe. He quit bashing big business and asked for help from big business to help gear up for the war effort.  The second is by economist Robert Barro concerning stimulus spending. He counters the claim by Keynesians such as Krugman that the problem in Europe is austerity and that massive fiscal stimulus is needed.  He argues that there is a short-run stimulative effect of an increase in government deficits but that it turns negative after a few quarters.  If he is correct, it could generate the same kind of problems the stop-go monetary policy we had in the 70s.  The stimulus in money supply would reduce unemployment shortly, but after awhile the unemployment went back up and was accompanied by ever higher inflation rates.  We could have bouts of stimulus that fails over time at everthing except generating higher debt levels.

Government Debt Receiving Attention.

Two items of interest related to federal government deficits are available today. The first is a letter written by ten former chairs of the president's Council of Economic Advisers. The ten include four who served democratic presidents and six who served republican presidents.

A second is a ranking of countries provided by the Comeback America Initiative. A video of his interview on CNBC is also available.

John Cochrane on Geitner's Proposal at the G-20

Today's WSJ has an interest op-ed piece by John Cochrane. Secretary of the Treasury Geithner called for G-20 countries to undertake policies that would reduce external imbalances below some specified share of GDP. It appears that Geithner is most concerned about China's trade surplus with the U.S. However, the U.S. has a trade deficit with many countries other than China.

China saves a lot more that the U.S., partially because China lacks a social security system. The only way middle-aged adults can plan for retirement is by saving today. It often appears that Americans believe social security provides a better retirement than it does since so many don't save much. However, one positive outcome of the recent financial and economic crisis is that Americans are saving more and borrowing less.

Cochrane points out several problems with Geithner's proposal. First, how does anyone know the proper amoung of saving any given country should have? Second, countries at different levels of development will have different outcomes with respect to trade balances. The U.S. borrowed abroad to fund the railroads in the 19th Century. Cochrane also points out that promises to fix our long-term problems later are hardly enforceable. Finally, there is a strong notion of an ability for government and international agencies to plan the operation of modern economies.

Cochrane's piece is worth a read.

Good Column on the National Debt

Greg Mankiw has a good column on the national debt in today's Wall Street Journal Business section.