Real World Economics: Debt, as theater, is fantasy and tragedy

Edward Lotterman

Asinine and pusillanimous politicians prompt benighted citizens.

That we once again watch the familiar political theater of raising the debt ceiling should tell us how we are becoming a northern hemisphere version of Argentina – a nation with tremendous economic potential but shackled by perennial political dysfunction.

Governments that don’t work inevitably feed back to economies that don’t. A nation gets stuck in a politico-economic rut. Most citizens suffer increasing frustration, but no leader seems able to break the deadlock.

We are in a rut that most people ignore. Annual growth of real GDP, the inflation-adjusted value of everything we produce, was just under 2% for the 20 years ending in third-quarter 2022, the most recent tabulation. That compares to 3.5% over the 50 years ending in 2000. If one looks at household incomes for the middle 60% of the population — leaving out the poorest and richest — the stagnation is even more pronounced.

Ascribing U.S. economic outcomes to some magical power of our presidents is an error, but if you like that game, look at key administration data: After-inflation growth was 5.3% a year for the tumultuous Kennedy-Johnson years, 2.7% for Nixon-Ford, 3.4% for Reagan and 3.7% for Clinton. (If you understand the Present Value – Future Value formula used with compound interest or growth rates like this, click here, (FRED GDPC1) to get a downloadable spreadsheet file for “real GDP” covering 1947 to the present. Then make whichever comparisons you might want.)

So now our economy is stagnating. Moreover, a Democrat is in the White House, so Republicans once again care about the annual budget deficit and the national debt. They control the House. So what do we do?

Well, for a start, return income tax rates to those prevailing on the day George W. Bush took the oath of office in 2001. We were in the fourth fiscal year of federal budget surpluses. These were the first since Lyndon Johnson’s last budget for FY 1969. The national debt “held by the public” was falling.

The new Bush administration, especially Vice President Dick Cheney, who played a much larger role than today’s largely invisible Kamala Harris, argued that a tax cut was critical. If trends continued, the national debt would be paid off by 2012. Catastrophe loomed! So we cut rates in 2001 and 2003. Moreover, we continued to shun any increase in FICA rates for Medicare, then already frozen for 14 years, even as the range of new medical treatments and the unit costs of existing treatments increased apace.

The rest is history. As the first administration elected in this century took office, the ratio of national debt to GDP stood at 55%. It had hit a post-World War II low of 30.6% as Jimmy Carter returned to Plains, Ga., in 1981. It had risen back to 65% by early 1995. With surpluses and a booming economy, the ratio then had fallen six years straight until the 2001 tax cut.

That debt-GDP ratio was 108% as COVID reached our shores in early 2020, slightly below what it had been in 1946 after our nation’s largest foreign war. As of the third quarter of 2022, that ratio is 122 percent.

What to do? Details are complicated, but two easy moves stand out. First, simply return personal and corporate tax rates to where they were in January 2001. Secondly, return the IRS budget to a level where it can enforce the law to the degree it could as we entered this century. Will this happen? Not a chance for the first, iffy for the second.

Many Republicans care about deficits and debt but somehow manage to suppress those concerns during Republican administrations and when contemplating tax cuts. Many Democrats worry about debt and deficits, but man-up to stuff such fears whenever facing votes to continue current programs or introduce desired new ones. Walter Mondale’s 1984 fate taught the Dems that taxes are electorally deadly.

Moreover, nearly all Americans decry deficits and growing debt, but few want to face realities involved. These are grim. Using the slightly-dated projections in the 2022 Economic Report of the President, all receipts will total just over $4.6 trillion and outlays just under $5.8 trillion.

Republican House Speaker Kevin McCarthy calls for “a cap on spending,” but promises to protect Social Security. The 8.7% COLA for that program alone will add $108 billion to outlays. Pay and benefits for currently serving military total over $160 billion. Their raise is lower than inflation on base pay, 4.6%, but higher, 12-14 % on non-taxable food, housing and other allowances. Military retirees like me got 8.7% on a prior total of some $71 billion.

The Veterans Administration gets about $104 billion. It may have waste, but the fraction of its beneficiaries entering high-medical-use ages is growing rapidly. And then there is interest, projected at $396 billion before the Federal Reserve started to raise interest rates.

So how, exactly, would McCarthy “cap” spending? Well, while the defense budget is up sharply with support for Ukraine, he thinks it advisable to cut programs for alternative military fuels like soy-derived jet fuel and any training of servicemembers that involves “wokeness.” Brilliant! And remember, once he solves current problems with his “spending cap” he stands ready to “start paying this debt off.”

Conservative pundit Hugh Hewitt is sure that enforcing tax laws would be bad for the economy. How to end adding to the debt? Well, terminate the Corporation for Public Broadcasting that funnels money to stations like those in Twin Cities and Prairie Public Television and to Minnesota Public Radio. With Fox and MSNBC, why do we need these biased broadcasters? That would save us about $475 million and would close a giant four-tenths of 1% of the deficit.

The adjective “asinine” is harsh, but fully applicable to the likes of McCarthy and Hewitt. “Pusillanimous” as a synonym for nervous cowardice is archaic, yet fits many Democratic politicians. But both these adjectives are accurate because all but a few U.S. voters cling to being “benighted,” quite literally, kept in the dark. And such collective “contemptible intellectual or moral ignorance,” leads us toward being the Argentina of the North.

(If you don’t like being benighted, mastering data tables in annual Economic Reports of the President is a good first step to recovery. Tables B-78 and B-80 in reports prior to 2015 and re-numbered as B-45 and B-47 since then are the most relevant. All are downloadable as text, PDF or spreadsheet files. Combine one from the 1990s that goes back to 1940, with the most recent one and you have 82 years of consistent data. The 2023 report will be available in a few weeks.)

St. Paul economist and writer Edward Lotterman can be reached at [email protected]