Federal Deficits, Debt, and U.S. Economic Growth

Background

I have been a political independent my entire adult life.  Whether it is being caught up in the cult of Apple iPhones or a professional football team, I want no part of it.  This is particularly true when it comes to political parties.  In 2016 election I split my votes between presidential and congressional candidates, Republicans and Democrats.

It is unfortunate that our society has become increasingly pulled to extreme sides of issues that should not be divisive.  Why should wearing a mask be an issue at all?  The government mandates that we wear clothes in public, and no one complains.  This chasm truly manifests itself on issues related to the economy, taxation, and expenditures for public services, and others such as climate change.  In this missive, I want to focus on the former—fiscal policy and its impact on the federal debt and economic growth.

In recent weeks, several economic related statistics caught my attention.  The first is that the US public debt exceeds GDP, the size of our economy.  Outside of WW II, this has not happened in modern history.  The second and related statistic is that the federal deficit for fiscal year 2020, ending in September 2020, will easily exceed $3 trillion.  Estimates range up to $3.7 trillion.  Needless to say, this is a record.  The third economic fact is that we are now in a very severe recession at the minimum, and the recovery will take considerable time, likely to the end of 2021 if not later.

Unfortunately, the current economic crisis follows closely behind the 2008-9 Great Recession. Therefore, in 13 years we have experienced two of the worst economic downturns since the Great Depression.  Many households that finally recovered and were experiencing positive economic benefits have been slammed once again.

Each of these three events can closely linked to one characteristic: Republican presidents. Now, before you stop reading, know that my intent in writing these missives is to avoid being biased toward either political party.  However, the Republicans currently stand out in their “balanced budget” hypocrisy and irrational economic policies, particularly with respect to taxation.  In other topic areas, Democrats will no doubt earn my ire.  But in these, Republicans dominate.

The Gallery of Post-Reagan Presidents

Let us start by working backwards.  Trump was elected in 2016, and Obama won in 2008 and 2012.  Bush was first elected in 2000 and re-elected in 2004.  Clinton was elected in 1992 and again in 1996.  Note that both Bush in his first term and Trump were elected by the Electoral College rather than by popular vote. 

Now the easiest thing in the world would be to inundate you with a lot of statistics.  Therefore, I will minimize them.  However, a few bullet points are in order.

  • Among the last four presidents (28 years), the largest budget deficits in our nation’s history have occurred under Republican presidents.
  • The concept that tax cuts “pay for themselves” has been disproven over and over again.  Yet, it remains the Republicans’ core belief.  Republican tax cuts under Bush and Trump (not to mention Reagan) have neither boosted business investment, productivity, or economic growth in any meaningful way.  They only added to the cumulative debt and benefitted the wealthiest in the process.
  • Ignoring the Covid-19 crisis, the budget deficit under Trump has expanded significantly with minimal if any benefit.  His tax cut was a pure scam. 
  • When you include the Covid-19 budget impacts, the deficit more than doubles in just this fiscal year ending September 30.  One can only guess at the number for fiscal year 2021.

US Deficit and Debt Reality (Not Alternative Facts)

The Clinton Years

It will surprise many that Clinton had the best fiscal performance of any president since Eisenhower.  His first full year in office was 1993, and the deficit that year was $255 billion.  This declined to $22 billion in 1997.  In the last 3 years of his presidency, there was a cumulative budget SURPLUS of $431.1 billion.

One common measure of the federal debt is the ratio of Total Federal Public Debt (TFPD) to Gross Domestic Product (GDP).  In other words, how large is the total federal public debt relative to the size of the economy.  This ratio is important because if public debt is rising faster than growth, it results in an increasing share of the economy consumed by financing the public debt.  A continually increasing ratio is simply not sustainable.

During the Clinton presidency, the ratio peaked at 65.3% in the first quarter of 1995 and then declined to 54.2% by the end of his second term.  This was positive for the economy.  It indicated that public debt was not crowding out private investment.  In fact, it was just the opposite.

The Bush Years

In 2000, the tech stock bubble burst.  In retrospect, it is hard to believe that so many investors bought stock in companies that had no expectation of being profitable. Accordingly, many investors sucked into the tech mania lost a lot of money, and there were fears of a recession.  It did not fully materialize, but economic growth was flat.  On that basis the Republicans pushed through a tax cut.  Following the 9/11 attack, there was a sharp increase in government expenditures due to our intervention in Afghanistan and the invasion of Iraq.

In Bush’s first year, the Clinton trend of budget surpluses continued and was $128.2 billion.  Due to the tax cuts and increasing government spending, this quickly evaporated.  Over the next 7 years, Bush ran deficits totaling approximately $2.135 trillion.  It is hard to derive an exact number for the cost of the Iraqi invasion, but $1 trillion+ has been viewed as a minimum estimate.

Imagine the infrastructure that could have been built and the health care that could have been provided by that truly wasted $1 trillion+.  Of course, the deaths and disabilities suffered by our men and women in our armed services dwarf that.

When Clinton left office, the ratio of TFPD to GDP was 54.2%.  After Bush’s first term, it was 60.9%.  When he left office, it was 73.5%.  Keep in mind that he bestowed to Obama the worst economic downturn since the Great Depression.

The Obama Years

The federal deficits were massive during the first term Obama’s presidency.  In 2009 the deficit was $1.4 trillion.  It exceeded $1.1 trillion for the next 3 years.  This was directly a result of the Great Recession that Obama inherited.  To stabilize the economy, government expenditures increased sharply.  Obviously, tax revenues plunged during this period. However, as the economy recovered and a real economic expansion took hold, the deficit averaged $548 billion for the last 4 years of his administration. 

Looking at it another way, the deficit was 9.8% of GDP in 2009 and 3.2% in 2016.  While this was not necessarily a desired target, the deficit had at least stabilized at a sustainable level.  When Obama took office during the Great Recession, the TFPD to GDP ratio was 77.3%.  When he left, it was 103.2%. 

Therefore, Obama’ presidency resulted in a 33.5% increase in TFPC, but this occurred primarily as a result of the Great Recession that he inherited from Bush.  In comparison, TFPC rose 35.6% during Bush’s presidency, and this primarily reflected his own policy decisions.

The Trump Years

Obama handed Trump an economy that had grown for 7 consecutive years.  During Obama’s presidency, the unemployment rate dropped from a peak of 10% to 4.9%.  Of course, Trump touts that he lowered the unemployment rate to 3.5%.  Considering that he enacted a $1 trillion+ tax cut in combination with substantial increases in government spending, this is no great achievement.  In other words, the positive economic trends were carryover from the Obama years.  Even without the Covid-19 crisis, the deficit was exploding. 

Republicans seem to believe that tax cuts are the solution to any and all problems, even when there is no problem to start with.  There was no reason for a tax cut.  It provided a very temporary boost to the economy.  The only thing that boomed was the deficit.  In the 2017-19 period the deficit increased by $2.4 trillion, and the deficit was accelerating.  Prior to the Covid-19 economic crisis, the deficit was projected to exceed $1.1 trillion this year.  Now, it will most definitely exceed $3 trillion, and recent estimates point to $3.7 trillion.

What exactly did we expect to gain from the tax cuts and boost in expenditures?  A surge in infrastructure spending–>NO.  A sustainable increase in economic growth–>NO.  A surge in new investment spending by the private sector–>NO.  What did we get?  A surge in the deficit–>YES.  A worsening of income/wealth inequality–>YES.

Summary of Federal Deficits and the National Debt

In the period under review, Republicans were responsible for enacting two major tax cuts and did nothing to moderate government spending.  These led to significant increases in annual deficits and the national debt.  The benefits of these tax cuts to the country at large are hard to discern. 

I have a suggestion for those continually advocating tax cuts.  Why not just propose to eliminate all taxes?  Then the economy will no doubt boom and everyone will benefit.

Right?

Economic Growth—A Similar Story

The Clinton Years

GDP is reported on a quarterly basis, and it is usually posted with around a six-week lag.  For example, the first estimate of GDP for the third quarter (July-September) will be provided in early to mid-November.  To be fair, this probably cost George H. W. Bush the election in 1991.  There had been a relatively minor recession early in his term.  Economic conditions were starting to improve, but the recovery was not verified until after third quarter GDP was reported.  The numbers were good.  It turned out that GDP grew at a 4.4% rate in 1992, but this was not known until after the election.

Clinton lucked out, but the economy did quite well during his two terms.  From 1996-1999, GDP grew by 4.4%, 4.5%, 4.9%, and 4.8%.  Recall that this was also the period when a budget surplus was being generated.  These growth rates have not been approached since Clinton.  However, the tech bubble did burst, and Bush took over a relatively weak economy.  Growth slowed to 3% in 2000, and it was basically flat in 2001, due primarily to 9/11.

The Bush Years

Most people think that the Great Depression ended with FDR’s New Deal.  This was hardly the case.  The Great Depression ended because of WW II.  It is often stated that war is good for the U.S. economy, and this was proven yet again. 

With his tax cut and the Iraqi invasion, the economy expanded by 2.1% in 2002 and 4.3% in 2003.  It continued to be reasonably strong in the next three years, ranging between 3.3% and 2.6%.  This was primarily due to new housing construction and related sectors, where the housing bubble was beginning to collapse in 2007.

The official recession, now known as the Great Recession, was an incredible disaster.  The housing market cratered across the U.S.  Nationwide, housing prices declined by 25% on average.  However, in Phoenix, Las Vegas, and parts of California, and Florida, the price declines were on the order of 60%.  Only drastic action by the Federal Reserve and other central banks precluded a total break-down of the financial system. 

The banks were bailed out with massive subsidies in various forms.  Domestic and international financial markets were in turmoil, and the only risk-free counterparty was the Fed.  Let us not forget that the auto industry and other economic sectors were bailed out as well. 

Obviously, there have been many articles and books written on this period, and no one entity was without some fault—government or private.  I was working on Wall Street at the time, and I was right in the middle of this.  It was a total nightmare.

This nightmare was handed to Obama.

The Obama Years

The GDP declined by 2.3% in his first year, 2008, and it was flat in 2009.  Recall that the stock market began its explosive advance in March 2009, and this preceded actual economic growth.  In a financial recession there is a normally a slow recovery.  This is because “deleveraging” has to take place, which means that bad debt has to be written down and/or liquidated before new lending can occur.  This takes time.  From 2010 to the end of 2016, the GDP grew at rates between 1.5% and 2.9%, not great but the economy was growing consistently.

Under Obama the GDP had been rising continuously for over 7 years.  Total employment grew continuously every month for over 7 years.  The unemployment dropped from 10% to 4.9%.  The stock market rose almost without pause for those 7 years.

The Trump Years

Trump was the recipient of a steadily growing economy and a declining federal deficit.  However, Republicans argued that the economy was “stagnant” and needed a boost, despite all of the trends to the contrary.  They were able to pass a significant tax cut which was intended to boost growth to as high as 6%, increase private investment and productivity, and “pay for itself” with revenues attributable to the higher growth rates.

To be fair, the unemployment rate declined from 4.9% to 3.5%, the lowest in decades.  However, it is very clear that the heavy lifting was done during the Obama years.

GDP growth never reached 6%.  In fact, it never reached 3% for an entire year.  The tax cut did not result in more private investment.  There was a temporary boost in the beginning that washed out quickly.  The only thing that soared was the federal deficit.  This tax cut was nothing more than a Republican scam.

Because of Covid-19, the economy declined by 9.4% in the first six months of 2020.  It is likely that there will be a partial recovery for the rest of the year, but GDP will likely not return to its prior level until sometime next year, perhaps even the second half of 2021 and potentially beyond.

There is a world-wide economic downturn.  One can certainly make the argument that Trump’s response, or lack thereof, to the crisis has made things worse than countries such as Germany.  He certainly cannot be blamed for most of the economic decline.  However, he is the president, and he owns some of it.

Summary

Facts are facts.

  • George H. W. Bush was president during a recession, but things were recovering when Clinton became president. 
  • Clinton presided over 8 years of growth, creating a budget surplus in the process.
  • George W. Bush eroded the budget surplus and oversaw the Great Recession during his watch.
  • Obama put the economy and the financial markets back on sound footing.
  • Trump’s tax cut did not result in any long-term economic benefits and only caused the federal deficit to soar.  This would have occurred independently of the Covid-19 crisis.
  • We are now in an unprecedented economic downturn linked to an unprecedented health crisis.  The only thing that we do know is that the deficit will continue to soar, and there is an absence of political initiative to mitigate the current economic trends much less provide any policies to spur a recovery and ultimately an economic expansion.
  • Whoever wins the coming election will inherit an exploding deficit coupled with a severe recession.

In the recent history of our last four presidents, it is clear that Republican presidents are certainly not the party of fiscal discipline.  Instead, Republican presidencies have been marked by substantial increases in federal deficits and failed tax cuts, with few if any relative economic gains to Democratic presidencies.  Moreover, the two worst economic downturns since the Great Depression have occurred during the Bush and Trump years.

Those are the facts.

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