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Economic Choices: Between Terrible and Worse
Can we be realistic here? The debt ceiling “compromise” signed into law Tuesday fixes nothing and ensures continuing uncertainty in financial markets and more ideological warfare in the months ahead. But congratulations Washington for putting the matches away and not burning the house down.
As all sides hold their noses while they get a good look at this really ugly baby, here’s what has not been accomplished.
Deficit Reduction: A little bit- but not much. $2.4 trillion over ten years against a $14 trillion debt with most of the cuts still to be determined by a “Super” committee of 12 angry, feuding lawmakers who start meeting around Thanksgiving. This ought to give us that much more to be grateful for.
Reduction in Entitlement Programs: They’re responsible for most of the debt but even the draconian cuts that automatically take place if our angry, feuding lawmakers can’t come to an agreement- don’t address Social Security, Medicaid or Medicare recipients. Some think this a good thing with a reeling economy causing so much misery but for a so-called attempt to bring spending in line, not a smart move to ignore consideration of the major contributors to the national debt.
Revenue: Two major commissions that set about to solve deficit-spending in the past year both came to identical conclusions. It cannot be accomplished by cutting alone. This is not about partisanship- it’s about math. There were plenty of Republicans on both these panels who endorsed the concept of raising revenue as a part of balancing budgets. See this column in the Washington Post that discusses these commissions and their discoveries. Alan Greenspan, one of the last human beings on the planet you would expect to favor tax increases is now in favor of exactly that. Blogged about it a few months ago.
Rational Process: We will forever more be holding future extensions of the nation’s debt ceiling hostage to the ideological flavors and fights of the day. This has nothing to do with party. Other than whichever party is out of the White House will, from now on, be pushing the nation’s economy to the brink in order to extract whatever it can from perpetually horrified future Presidents, Democrats and Republicans alike.
The Current Economic Mess: The 1,000 point Dow Jones meltdown that would have been expected had the debt ceiling not been passed was replaced instead by a 265 point meltdown out of fears stoked by today’s weak and struggling economy that the debt ceiling agreement does little to address.
But in the end, was it a good thing the debt ceiling bill passed? Well, as Alan Greenspan put it so eloquently in September of 2010, “Our choice is not between good and bad but between terrible and worse.”
Deficits R Us- A Guide to the History of U.S. Deficit Spending
You would think with all the angst about government red ink, that this is, somehow, a new thing in the history of this country. There’s nothing new about it. For more than a century now, we have been in deficit 70% of the time.
I’ve referenced DaveManuel.com, a reputable newsletter on financial and Wall Street issues and trends. Here are their deficit stats .
Here’s the big chart that tells you our deficit history at a glance for the last 72 years, from 1940 through now:
That’s 60 years in the red and only 12 in the black. We had a better record of balanced budgets from 1900 to 1940; 18 years with a deficit, 20 without and 2 in which we broke even. Total record over 112 years:
78 years with a deficit
32 years in surplus
2 years in which we broke even
Now, I’m no economist and I’m sure my analysis is both amateurish and superficial. But there are several striking things that pop out at you when you overlay historical events over these deficit charts.
When did we have our longest periods of budget surpluses?
Well, we did quite nicely from 1920 to 1930. And we did well again from 1998 to 2001. What do these periods have in common? Boom times. When the economy was cranking along and people were getting rich left and right and government coffers were getting filled to the brim.
What about our worst periods of budget deficits?
The period of 1931 to 1946 was a bad 15-year stretch. Following the roaring 20’s of course, we hit the Great Depression and government spending increased dramatically to combat raging unemployment. On top of that, we funded World War II.
We had a brief period of balanced budgets in the late 1950’s and then went back into debt in a big way in the 1960s. History shows us Lyndon Johnson was leading the Great Society initiatives and funding the Vietnam War all at the same time.
In fact, from 1961 until 1997…there’s only been one year we had a balanced budget.
So we went through 4 years of surpluses in the late 90s/early 2000’s and then what happened?
Two things, we were attacked on 9/11 and the Republican version of LBJ. Instead of Great Society programs, it was across-the-board tax cuts and we funded two wars; Iraq and Afghanistan- all at the same time. And the next big spike? The financial collapse of 2007-2008.
When does deficit spending happen?
I see three basic circumstances at play that determine our national balance sheet.
1) When we’re in boom times we’re remarkably good at balancing budgets.
2) When wars and economic adversity hit, we spend like there’s no tomorrow but these are largely external events that we are reacting to.
3) When we fight wars and press for highly ideological agendas- like Democrats with the Great Society programs and Republicans with massive tax cuts. These are deficits (and some would argue wars- Vietnam and Iraq) of our choosing.
Are deficits dangerous?
They can be if they get past a critical percentage of the size of your total economy. The deficits we ran in the World War II era represented the largest percentage of deficits against GDP (Gross Domestic Product) in history; between 21% and 30%. Our current deficits, as big as they are, represent about 10% of our GDP.
Are we handing a history of deficits and doom to the next generation?
Yes and no. Lest you feel sorry for all the red ink we’re handing our children, history shows us they’ll be ok because they will spend what they have to on their unforeseen wars, economic calamities and favorite government programs and then hand off the ensuing debt to their offspring.
Garcia Media Life 
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