The debt bomb

The Washington Times Weekly - - Editorials -

One of the most im­por­tant eco­nomic ra­tios in­volves the re­la­tion­ship be­tween gross fed­eral debt (i.e., the na­tional debt) and gross do­mes­tic prod­uct (GDP), which rep­re­sents to­tal eco­nomic out­put. A de­clin­ing debt/GDP ra­tio gen­er­ally means that the econ­omy is grow­ing faster than the na­tional debt. When that trend per­sists over time, the re­sult is that the bur­den of the na­tional debt be­comes smaller and smaller, rel­a­tively speak­ing. A ris­ing debt/GDP ra­tio gen­er­ally means that the na­tional debt is grow­ing faster than the econ­omy. When that trend per­sists, the re­sult is that the bur­den of the na­tional debt in­creases.

At the end of fis­cal 1941, the debt/GDP ra­tio was 50.4 per­cent, and the na­tional debt stood at $57.5 bil­lion. Five years later, fol­low­ing the end of World War II, the debt/GDP ra­tio peaked at 121.7 per­cent as the war-re­lated na­tional debt soared to $271 bil­lion. Over the next 35 years, ex­cept for an oc­ca­sional blip, the debt/GDP ra­tio steadily de­clined un­til it reached its low­est post­war level of 32.6 per­cent in 1981. Be­tween 1946 and 1961, for ex­am­ple, while the na­tional debt nom­i­nally in­creased from $271 bil­lion to $292 bil­lion, the econ­omy grew so much faster that the debt/GDP ra­tio plunged to 55.1 per­cent. More­over, just as the ra­tio had fallen sig­nif­i­cantly dur­ing the Korean War (from 94.1 per­cent to 71.3 per­cent), it also de­clined dur­ing the Viet­nam War, fall­ing from 51.8 per­cent in 1963 to 35.7 per­cent 10 years later. As noted, at the end of fis­cal 1981, even though the na­tional debt had reached $1 tril­lion, the post-World War II debt/GDP ra­tio reached its nadir at 32.6 per­cent.

From 1981 through 1996, soar­ing, per­sis- tent bud­get deficits con­trib­uted to an ex­plod­ing na­tional debt. The na­tional debt was fur­ther aug­mented by bor­row­ing the sur­pluses from nu­mer­ous trust funds (So­cial Se­cu­rity, Medi­care, fed­eral-em­ployee and mil­i­tary re­tire­ment funds, etc.). Be­tween the end of the 1981-82 re­ces­sion and 1996, only a brief, mild re­ces­sion in­ter­rupted gen­er­ally very ro­bust growth of the U.S. econ­omy. Even so, the uni­fied bud­get deficits and the bor­row­ing from the trust funds were so mas­sive that the debt/GDP ra­tio soared from 32.6 per­cent in 1981 to 48.1 per­cent in 1986, 60.6 per­cent in 1991 and 67.3 per­cent in 1996, when the debt/GDP ra­tio reached its cycli­cal peak. The cor­re­spond­ing lev­els of the na­tional debt mas­sively in­creased from $1 tril­lion in 1981 to $2.1 tril­lion in 1986, $3.6 tril­lion in 1991 and $5.2 tril­lion in 1996.

In 1998, the fed­eral bud­get pro­duced its first uni­fied sur­plus since 1969. By fis­cal 2000 the uni­fied bud­get sur­plus was $236 bil­lion. Af­ter ris­ing by nearly $1.2 tril­lion dur­ing the 1993-1996 bud­get pe­riod (from $4 tril­lion at the end of fis­cal 1992 to $5.18 tril­lion at the end of fis­cal 1996), the growth in the na­tional debt sharply de­cel­er­ated dur­ing the next four years. The na­tional debt in­creased by less than $500 bil­lion dur­ing the 1997-2000 bud­get pe­riod. In fact, the fis­cal 2000 uni­fied sur­plus was so large that it nearly off­set the trust-fund bor­row­ing that year. Thus, the na­tional debt in­creased a rel­a­tively in­fin­i­tes­i­mal $23 bil­lion in fis­cal 2000, reach­ing $5.63 tril­lion.

By 2001, the debt/GDP ra­tio fell to 57.4 per­cent, hav­ing plunged nearly 10 per­cent­age points in five years. Over the next six years, how­ever, uni­fied bud­get deficits achieved record nom­i­nal lev­els, and bor­row- ing from trust funds reached fis­cally epi­demic pro­por­tions. Dur­ing the last six years, the na­tional debt in­creased by a stag­ger­ing $3.25 tril­lion, or 56 per­cent. The na­tional debt now ex­ceeds $9 tril­lion. Be­cause the econ­omy has been grow­ing much slower than the na­tional debt, the debt/GDP ra­tio is now about 66 per­cent, nearly 10 per­cent­age points higher than just six years ago.

The Bush ad­min­is­tra­tion and con­gres­sional Repub­li­cans have spent the past sev­eral weeks cel­e­brat­ing the fact that the uni­fied bud­get deficit for fis­cal 2007 ($161 bil­lion) was 1.2 per­cent of GDP. But that ra­tio has be­come in­creas­ingly mis­lead­ing in re­cent years be­cause the an­nual in­crease in the na­tional debt has dwarfed the uni­fied bud­get deficit and the nom­i­nal growth rate of the econ­omy. While cu­mu­la­tive uni­fied bud­get deficits dur­ing the past five years have as­tound­ingly ex­ceeded $1.5 tril­lion, the cu­mu­la­tive in­crease in the na­tional debt over the same pe­riod has been a much more mind-bog­gling $2.8 tril­lion. That is nearly dou­ble the cu­mu­la­tive in­crease in the more widely re­ported bud­get deficits, which have be­come in­creas­ingly less im­por­tant (rel­a­tively speak­ing) than the change in the na­tional debt.

Af­ter reach­ing a mi­nus­cule 0.24 per­cent in 2000, the ra­tio that mea­sures the an­nual in­crease in the na­tional debt to that year’s GDP has av­er­aged 4.63 per­cent dur­ing the last five years. That trend should not be oc­cur­ring dur­ing an eco­nomic ex­pan­sion, and it raises the ques­tion: Just how ro­bust would the econ­omy have been dur­ing the past five years with­out the fed­eral gov­ern­ment’s bor­row­ing binge, which has pro­duced a fis­cal dis­as­ter?

Mean­while, if the first Baby Boomer was con­ceived on V-E Day, then she will be­come el­i­gi­ble for So­cial Se­cu­rity next Fe­bru­ary and Medi­care three years later. More­over, the Bush ad­min­is­tra­tion’s up­dated five-year (2008-2012) bud­get blue­print, which is rid­dled with crazy, self-serv­ing as­sump­tions (such as this gem: The cost of its Global War on Ter­ror will de­cline from nearly $200 bil­lion in 2008 to $50 bil­lion in 2009 and zero there­after), still man­ages to project an­other $2.5 tril­lion in­crease in the na­tional debt. It’s go­ing to get a lot worse be­fore it gets bet­ter.

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