The Effects of the Deficit on the Economy

Those of us living in the United States should pay attention to warnings – the dilemmas with public debt could very easily lead to effects as destructive as he predicts. In nineteen forty-five, the national debt was at two hundred-sixty billion dollars, a figure few people feared because we had just fought an important war. Government-procured debt is generally considered an effect of war, and in the first five years following the war, some of the debt was paid down. But this was only a brief interlude. Starting in nineteen sixty and stretching through two thousand-four, there hasn’t been a single year when the national debt was reduced, not even in a small percentage. On the contrary, from Richard Nixon’s presidency until now, the smallest annual growth rate in the debt was three point eight percent in nineteen seventy-four. The largest was a whopping twenty point six percent in nineteen eighty-three, the third year of Ronald Reagan’s presidency. In nineteen seventy, the accumulated national debt equaled roughly one-third of the gross domestic product. By two thousand-three it equaled nearly seventy percent – a virtually unsustainable progression.

The federal government deficit figures, which sometimes show a real surplus, do not reflect the real additions to the national debt; they reflect receipts minus expenditures instead, with borrowings from the Social Security trust fund counted as a revenue. As such, the deficit has become more of a political number than one based on firm accounting methods. A quick review of the numbers from the Nixon era until now is worth the exercise, even if its only to show how economic and political decision-making affects numbers.

During the Nixon era, the biggest deficit was roughly sixty billion dollars, that occurred during the prolonged Vietnam war. The deficit spiked during the Gerald Ford years because of a fairly strong recession that encouraged increased government spending. The Jimmy Carter years were relatively subdued from a point of view of the deficit, even though the nation was crippled by high oil prices and inflation. Under Ronald Reagan, deficits apparently got totally out of control, firstly because of the military buildup that finally brought the Soviet Union to its knees and terminated the Cold war. George H.W. Bush’s administration inherited the last vestiges of the military buildup under Reagan, including the Iraq War, and suffered a drop in revenue in the early nineteen nineties recession. The government went into surplus during the Bill Clinton years under the stewardship of Treasury Secretary Robert Rubin and his so-called strong dollar policy. However, under George W. Bush’s administration, the United States reels under the high-cost war against terrorism, another recession, and a second very expensive war in Iraq. In fiscal year two thousand-three, the bush administration added over five hundred fifty billion dollars to the national debt in just one year – this is a record. In two thousand-four, the national debt went over seven trillion dollars and, if this spending growth rate continues, the Bush administration could easily suffer the indignity of overseeing the first one trillion dollar addition to the national debt in one single year.

If that doesn’t sound bad enough, the accumulated debt figure that is heard so much about does not include the massive obligations and spending that have happened off budget. CNNMoney recently reported that Jagadeeth Gokhale, an economist at the Wharton School project a forty-four trillion dollar shortfall between revenue and future obligations, fueled principally by Social Security and Medicare payments and expected to mushroom when the Baby Boom generation starts to reach retirement age.

The net interest on the United States national debt is approximately seventeen percent of what the government collects in corporate and individual taxes. Interest payments, even with rates at lows which have not been seen since the nineteen sixties, are still the third largest federal government expenditure, after military defense and social welfare spending. This implores the question, what would happen if interest rates moved up by even one or two percent? Maybe the economic planners in Washington D.C. do not have the desire to know. Maybe we don’t even want to know. It might be too scary a scenario. The national debt, like the monster of Frankenstein has taken on a life of its own. Most people have heard about the debt clock ticking upward at the rate of roughly two billion dollars per day, approaching at the current rate over seven hundred billion dollars per year. But few people understand the significance of these numbers to the average American. The current national debt translates to twenty-four thousand dollars for every man, woman and child in the United States, or almost one hundred thousand dollars for the average American family composed of four members. That debt load increases by roughly five thousand dollars per year, with no end in sight.