Sunday, July 22, 2012

A Touch of Wonkery.

I want to take some of the edge off one comment from last week.  In my diatribe against Samuelson’s imbecilic effort to blame all the sins of the known galaxy on John Kennedy, I leaned a little too hard in another direction.  I said this:

“…deficits as a fraction of GDP began to rise not in the sixties, or even in the seventies, but in the eighties after the Reagan tax cuts, and averaged 4% of GDP during that decade.  They fell again over the nineties, largely under Bill Clinton, and the nineties ended with budget surpluses, and then deficits rose again to 4% to 5% of GDP under Bush after the Bush tax cuts.”

That sounds as though I’m blaming parties, rather than policies, and I don’t really mean to do that.  It sounds like I am blindly trying to blame Republicans for a situation over which they did not exercise complete control.  Here’s a graph from this web site that shows the basic story of deficits by president:

The reply from those who blindly want to blame Democrats instead would be something like: during the eighties the Democrats controlled the House of Representatives through the whole decade, and controlled the Senate too from 1987 to 1994, and it was their excessive spending that caused all of those deficits under Reagan; and in the nineties the Republicans controlled both houses of Congress from 1995 through 2000, and they were the cause of the surpluses at the end of the nineties.  They would point out that under the Constitution it is Congress who holds the purse strings.  Congress passes the budgets.  Of course those same people want to blame Obama for the deficits that have happened under his Presidency, even though the Republicans have completely dominated the House for the last two years, and have done their best to control the Senate as well using filibuster rules.  To further muddy the issue, here’s a graph from the Wikipedia Public-Debt-By-President entry

Here’s a link to an interesting compilation that allocates Federal deficits and debts by party control of Congress or the Presidency.   It shows some unexpected results in some ways; for example, the author of that page notes that the first year of any President’s administration is conducted under the budget passed in the previous year, that is, it is the last budget of the prior administration.  Using this, he shows that the first actual Obama budget, meaning the year starting in October of 2009, significantly reduced the deficit compared with the budget that was in place when he took office.

But the point of this whole blog entry, is that this graph is a little misleading because it seems to imply that the whole reason that the debt grows or shrinks is because of who is in office, rather than what they do there.  A much, much better approach would show how the trajectory of public debt changes after identifiable policy changes, rather than who happened to be in office when those changes took place.  As a start to that, I’ll state as an observation of rough data going back to the beginning of the United States as a country that the biggest factor in increases in the national debt, as a general rule, is war.  Wars are expensive.  But the second biggest factor is recession.  Here’s a graph from the Federal Reserve Economic Data site (FRED) showing gross national debt as a percent of GDP from 1947 to now:

In this graph the gray bars are “official” recessions, but the actual recession issues generally begin before the gray bars and continue for a time after.  The ticks up in the forties and fifties are clearly associated with recessions, and the radical upward kink in about 2007 was---and is---associated with our current massive recession.  Similarly the start of the rise in 1980 is associated with the large (and intentional) recession then.  But revenue collapses or increased social spending from recessions can’t explain the continuation of the rise in debt through that decade and into the next.  And it can’t explain the rising debt as a share of GDP in the first decade of this century.  Those were both pure policy change, not war or recession.

I’ll add a final graph that may help to see this.  It’s the same data as the graph above, only in this one I’m showing the change in debt as a share of GDP, the change from one data point to the next in the graph above:

See all the high points in the middle of the gray bars?  Recessions are big factors in the creation of Federal debt.  During recessions revenues fall and costs rise.  

After the recessions this line falls again, and even in this recession, at the very end of the chart, we are already on a declining path.  But I’ve also added a heavy bar across the graph at zero on the vertical axis.  The thing to notice is that most of the line before 1980 is below zero, meaning that we were reducing the debt as a share of GDP.  Most of the line after 1980 is above zero, except for a few years at the end of the nineties. 

That’s what has to be explained, based on a policy change, not on which party happens to hold office at any time.   There are a number of significant policy changes that began around 1980, some before 1980.  But the big one as far as the deficit is concerned, I think, is tax policy.   Kennedy and Reagan both proposed tax reductions, but Kennedy’s was constrained enough that the debt as a share of GDP continued to decline, particularly during times when the economy is proceeding at a healthy pace.  To Kennedy that mattered.  Contrary to the popular image, that is the policy embedded in the basic Keynesian view, and the one Keynes himself prescribed: deficits during recessions to restore sufficient demand to create full employment, but reduced deficits or surpluses in ordinary times. 

 To Reagan and those around him, the tax reduction mattered far more than any other economic result; tax reduction was not a tool of policy, it was policy’s most compelling goal.  And that attitude has solidified to concrete since then, so much so that no deficit reduction package that includes any tax increase at all, even back to the historically low taxes of the 1990s, has any chance of passing.   This mistake has infected both parties, in truth.  Even the Democratic proposals for reducing the deficit are mostly spending cuts these days, and very few revenue increases.  And that, I believe, is a large part of what has gone wrong in the last thirty years: not the party of the person who happens to sit in the Presidency, but the wrong ideas that dominate the political world.  

As Keynes once said---I forget where---"It is ideas, not vested interests, which are dangerous for good or evil."

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