The U.S. Debt Problem

Timothy Taylor discusses an article by Daniel Thornton on the origins of the debt problems in the United States.

Thornton locates the start of the problems back to about 1970. In the chart of annual deficits, for example, notice that after about 1970 a pattern of volatile but growing deficits emerges. The pattern is interrupted for a few years in the late 1990s by the higher tax revenues and lower social spending resulting from the unsustainable dot-com boom, but a return to the larger deficits was coming eventually.

Recall that in this post I said that in the 1960s two taboos were broken. One was a taboo against deficit spending in peacetime. The other was a taboo against Social Security surpluses in order to spend elsewhere.

In deference to the season, I would say that we face the ghosts of deficits past, deficits present, and deficits future. The ghost of deficits past is the debt we accumulated starting in the 1960s in spite of good economic performance and falling defense expenditures (as a share of GDP). The ghost of deficits present is what Keynesians call the “fiscal cliff,” meaning the horrible recessionary consequences that they predict would follow were Congress to actually follow through on its recent commitments to try to reduce deficit spending from currently high levels. The ghost of deficits future is the fact that projections for spending going forward show increases to unprecedented levels relative to GDP, driven largely by health care spending. The ghosts of deficits future mean that (a) we cannot count on a “peace dividend” to solve the budget problem and (b) we cannot easily inflate our way out of the problem (inflation will raise the cost of future obligations and send interest expense soaring).

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9 Responses to The U.S. Debt Problem

  1. djf says:

    How is it that “lower social spending” resulted from “the unsustainable dot-com boom” (as stated in the quote). I don’t really see a cause and effect relationship there, except insofar as high employment means a lesser amount of welfare transfers. Also, wasn’t the decline of defense spending more important to the surpluses of the ’90s than any changes in social spending?

  2. Rohan says:

    Maybe he means “lower social spending as a percentage of GDP”?

  3. ~FR says:

    djf: “wasn’t the decline of defense spending more important to the surpluses of the ’90s than any changes in social spending?”

    Maybe not. Steve Hanke argues that Clinton cut the civilian side harder than the military. I put the link under my name (LUN.)

    • djf says:

      FR, I’d be interested if there are any figures backing up the argument you refer to. This is the first time I’ve ever heard that federal social spending was substantially cut under Clinton. I don’t see any link in your comment.

      • ~FR says:

        Hi djf- just click my ‘name’ (~FR) … the shortened link is http://bit.ly/WHnbux

        • djf says:

          The post by Hanke says that federal social spending declined as a percentage of GDP during the Clinton years, not that there were cuts. Thus, the decline in FSS’s share of GDP probably reflected the growth of GDP growth, not a real reduction in FSS. While there was certainly a “squeeze” on such spending, I think Hanke wrongly gives Clinton sole credit for it As you may recall, there was also a GOP Congress starting in Jan 1995. The restraint of spending probably resulted from the cominbation of a Dem president and a GOP Congress not being able to agree on new social spending programs (and agreeing to cut defense).

          • ~FR says:

            That sounds entirely reasonable- Welfare Reform was passed in ’96 I believe. The point (I believe) is that the balanced budgets during the Clinton administration were not achieved entirely or principally by cutting defense. Nor was it an optical-illusion caused by the tech-boom.

  4. “…Instead, Thornton locates the start of the problems back to about 1970. In the chart of annual deficits, for example, notice that after about 1970 a pattern of volatile but growing deficits emerges. The pattern is interrupted for a few years in the late 1990s by the higher tax revenues and lower social spending resulting from the unsustainable dot-com boom…”

    Reagan and Clinton scrubbed from history. Who’s supposed to buy this, Amnesiacs?

  5. djf says:

    FR – The surpluses would not have happened without the defense cuts. And I believe (without rechecking) that Hanke lumps together all nondefense spending. Thus, even if there was an actual reduction in nondefense spending, this might well have been due, not to any reduction of transfer payments or contraction/elimination of programs, but to reduced administrative costs as a result of digitalization, which dramatically reduced the need for, e.g., typists and file clerks throughout government, as in other industries. In addition, there was some deregulation during the 90s (which the Left now laments, of course), and this may have resulted in some savings, as well.

    As for welfare reform, whatever significance it had as a social policy, I have never heard that it resulted in enough savings to significantly impact the federal government’s fiscal condition.

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