Article by Jeffery Lundblad
I am going to diverge a bit from my previous posts and comment on the issue #1 in the United States: Spending. It has been the customary practice to separate ‘government spending’ from ‘tax cuts, but as far as the balance sheets are concerned, they are essentially the same; both result in the government losing money. The latest budget released by President Obama forecasts a budget deficit of about .5 Trillion. In other words, the government will spend .5 Trillion more than it takes in through taxes and other forms of revenue. That number is then added to the decades of deficits that the government has accumulated; the total of which is currently over Trillion.
Now, it is important to realize that the size of the debt itself is not what matters, but rather the ratio of the debt to the size of the economy as a whole. Why? It’s the same reason a bank needs to know the income of someone taking out a mortgage. After all, a 0,000 mortgage (debt to be paid) made to a person who’s income is ,000 is very different from the same mortgage made to someone who’s income is 0,000 a year. The chance that the former will default is a lot higher than the latter. Hence, the ratio of the debt to income is more important than the debt itself because it determines the debtors ability to repay.
The graph above neatly outlines the debt-to-GDP ratio in the post WW2 era in the United States. After massive spending and reduced tax revenues in the wake of the Great Depression, combined with prolific spending on defense during WW2, the level of debt reached an all time high of 100% of the GDP. Thereafter, the economic growth outpaced the growth of the debt, falling to just ~35% of the GDP by the start of the Reagan Administration. Huge tax cuts and spending increases (particularly on defense) drove the debt back up to ~65% of the GDP by the end of the Reagan/Bush I era. The debt level tempered a bit in the 1990s, driven by reduced military spending and a strong economy. But just then, Bush II cut taxes yet further and spearheaded two expensive military campaigns which drove the ratio up to about ~75% of the GDP by the time he left office.
Today, as the financial crisis continues, tax revenues have sagged and the government has upped spending to shore up the economy. While most of this spending is justified, the deficits we are now running are unsustainable and MUST be reduced drastically in the next few years. The debt to gdp ratio is closing in on 100%, and could hit 120% in a few years if no action is taken.
That said, it isn’t like the government is doing nothing. President Obama’s budget has a slew of creative cuts (alongside creative accounting), ranging from painting embassies white to save energy to using videoconferencing instead of actual meetings to save on transportation costs within government agencies. Nevertheless, neither Democrats or Republicans, as a whole, have the political stomach to wrest control of the situation.
In fact, when one looks at the raw numbers they can’t help but smirk with irony. Since the Carter Administration and until the end of the Bush Administration there have been 5 Republican and 3 Democratic Presidencies. If you count the deficits accumulated under each administration and average them out, you will find that Republican Presidents outspent their Democratic counterparts by more the 4 to 1. The ‘fiscal conservatives’ who have prided themselves on ‘small government’ and ‘balancing the budget’ have contributed largely the the problem we find ourselves today. To be fair, if we were to factor in the deficits being run under the Obama Administration, the Republicans wouldn’t look so bad.
Democrats are failing to understand that significant cuts are needed in entitlement programs. Simultaneously, Republicans refuse to cut spending on defense. For the record, the United States spends more on defense than the rest of the world COMBINED…and that is EXCLUDING funds for the wars in Iraq and Afghanistan. Most importantly, Republicans do not seem to understand that you cannot balance the budget and cut taxes at the same time. Difficult choices must be made, but our politicians can only see ahead to the next election, and few are willing to do what it right for the next generation.
From: http://politikalmatters.blogspot.com/
About the Author
I am a student of Political Science at the University of Illinois at Urbana-Champaign. My specialty is in American and Chinese politics. I created this blog to right the wrongs of the media, and to provide a unique perspective on contemporary political matters.