The Road Out of the Debt Crisis is Apparent

I submitted the following to CNBC’s Squawk Box.  I provided two graphs of our national debt over time, one using inflation adjusted dollars and the other with the debt expressed as a fraction of our economy (in this case GDP).  Our country had its highest debt level following WWII (123% of GDP).  I pointed out that this debt was not paid off (it remained flat between 1950-1980 when expressed in inflation-adjusted dollars) but was reduced over time when expressed as a fraction of our economy – we reduced debt by growing our economy.  This presents the road out of the current economic crisis; we need a plan that will grow the economy of our future – we need to be forward looking.

As a note, if there is any question as to the impact of tax policy on the national debt, both graphs demonstrate the substantial debt that occurred under supply-side tax cut policies (1981-1992 and 2000-2008) and how the tax and economic policies between 1993-2000 reduced debt by achieving the longest period of economic growth in US history as well as generating 3 years of surpluses.  Under supply-side tax cut policies our national debt went from less that $1 trillion in 1980 to almost $12 trillion in 2009 (what was already on the books), an accumulation of debt that outran the growth in our economy, and weakened us during a a severe economic downturn when the government needed to step up as the spender of last resort to buoy the economy.

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August 19, 2010

The way forward regarding the debt issue will not by paying it down as much as it will be by having a plan that will grow the economy now and decades into the future.  As shown in the two graphs below, with the exception of 3 years of surpluses in the late 40’s (we had the same 1998-2000), our national gross debt remained flat on an inflation-adjusted basis between 1950-1980.  However, it was reduced as it became a smaller fraction of our economy over time.  The debt issue is one that will take decades to address, it will take long-range planning, something that our instant gratification culture is poor at, but where the Chinese are typically quite good.  I would actually support a targeted stimulus to jump start initiatives that would support our future growth, such as education (our children will be the drivers of future businesses and the creators of jobs, and we have fallen behind other nations), alternative energy and reducing our dependence on oil (this is a security issue as there will be competition for oil resources with emerging markets), and infrastructure (not just brick and mortar but technology-based like smart grid that improves the efficiency of energy delivery ($11 billion is targeted here in the current stimulus).

The tax cuts for the wealthy were not intended to support consumption, but rather to stimulate capital accumulation and business investment – and it failed; gross investment was actually more than 3 times greater during the 1990’s than either of the supply-side periods (and the tax benefit to the wealthy does not necessarily even remain in this country).  Those cuts drove up debt with, at best, very questionable economic benefit.  I remember the same dialogue in the early 1990’s during the OBRA93 debate that raising taxes on the wealthy would be disastrous to our economy, yet the 1990’s has been cited as the longest period of economic growth in our history – the tax policies in the 1990’s better favored consumption than did the supply-side policies (demand drives investment, not the other way around).

I have lectured on this matter, and I believe the solution to the debt crisis is before our very eyes.  Now, can we get a good plan through the bitter political partisanship that will stimulate job growth and have both immediate and pong-term economic impact?  Our voting public needs factual information rather than partisan soundbites on this matter.

National Debt adjustedNational Debt Graph

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