Sunday, March 05, 2006

Economic Trends

When I first became reading the news carefully in the early 1960s (largely because I was living outside the United States), economic news received far more emphasis than it did today. The middle aged and elderly men who wrote and published the news and ran the government in those days had all lived through the Depression and its terrible consequences as adults and put the highest priority upon making sure that nothing similar happened again. Presidents and their advisers carefully tried to balance the budget, although Democrats had adopted the idea that relatively small deficits--say, around one per cent of gross domestic product, such as the Kenendy Adminstration ran in that period--might contribute to reducing unemployment without threatening inflation. The stability of the dollar and other currencies also remained a major pre-occupation, and the dollar remained convertible into gold until 1967. The first major crack in the edifice of national fiscal responsibility grew out of the Vietnam War, in this as in so many other ways a pivotal episode in our history. The deficit reached 2% of GDP by 1968, and Lyndon Johnson responsibly insisted on raising taxes to reduce it, balancing the budget (no doubt with the help of a little creative accounting) in 1969. President Nixon, however, let the surtax lapse, and the deficit was back up to 2% of GNP in 1972. Inflation, meanwhile, which had been kept under control in the early 1960s, had taken off, and the United Staes had a current account deficit.

Partisan though it may sound, it really is no exaggeration to say that our history since then has been one of Republican profligacy, balanced by intermittent bouts of Democratic restraint. The deficit had reached more than 4% of GNP by 1976, but Jimmy Carter had it below 2% by 1979 (it rose again to 2.6 % in 1980.) Ronald Reagan, of course, broke all records for irresponsibilty. His deficits averaged 5% of GNP for the four middle years of his Adminstration, although the Graham-Rudman-Hollings Act managed to reduce them to 3% by the end of his second term. Things got worse again in the second half of George H. W. Bush's Administration, and the deficit reached almost 5% of GDP despite Bush's courageous (and politically disastrous) renunciation of his "no new taxes" pledge. But Bill Clinton raised the top tax rates again in 1993--carrying the proposal by a single vote in the House of Representatives--and bowed to the budget-cutting will of the Republican Congress after 1994. The deficit as a percentage shrunk from 3.9% in 1993 to .3% in 1997, and the country actually ran a surplus for the next four years, one that peaked at more than 2% in fiscal 2000. The national debt, as a percentage of GDP, had fallen from a high of 67& of GDP in 1996 to just 57% in 2001. Then came the advent of the new Republican majority.

By this time, of course, the GI generation had gone into retirement, and only a few men and women in their late 60s or 70s still remembered the Depression, when they had been very small children. Postwar children like President Bush had never known or even seen real widespread economic hardship, but they had been repeating the mantras of low taxes and smaller government for at least twenty years. Their tax cuts, as I showed in a post more than a year ago, had a catastrophic and continuing effect on the federal budget. The federal budget has gone from a 2% surplus in 2000 to deficits of 3.5%, 3.6%,and 2.6% in the last three fiscal years, and it is projected to go to 3.3% in the current one. Despite Republican propaganda there is absolutely no doubt that the Bush tax cuts are completely responsible for this. Federal expenditures, as a per cent of GDP, have gone up slightly, from 18.5% in 2000 to 20.1% lst year, but receipts have fallen far more, from 19.8% to 16.3% in the first three years of the Bush Administration (before recovering slightly this year.) The national debt is exploding, rising from a low of 57% to 64% in the last five years, and projected to hit an all-time record of 67.5% of GDP in two years.

The national debt statistic is perhaps the most interesting barometer of our national level of economic responsibility. The debt substantially exceeded GDP for the years 1945-7, but then saw its percentage of GDP fall steadily for thirty years, reaching a low of 33.6% in 1974. (The absolute debt, of course, continued to grow, but the economy grew much faster.) After a big rise in the next few years, Jimmy Carter had cut it back to 32% before leaving office. Then came the deluge. The national debt as a percentage of GDP doubled during twelve years of Republican rule from 33% in 1981 to 66% in 1993. It fell to 57.4% at the end of the Clinto years but, as noted, is projected to hit an all time record in fiscal 2007.

The second Bush Administration has had an even more amazing impact on our trade deficit. Their economists have done their best to conceal this particularly impact of their policies. The figures in the last two paragraphs comparing budget deficits and national debt as percentages of annual GDP all came from the current economic report of the President, but no such tables have been published to give some idea of the relative importance of the trade deficit, and I have had to do those calculations myself. Once again we see that Republican rule has destroyed the United States' competitive position, although in this case the Clinton Administration has to take a lot of the blame as well--probably because of NAFTA. Until the Reagan years the United States had never run a current account deficit of as much as 1% of GDP. The Reagan "recovery" after 1983 coincided, of course, with the beginning of the de-industrialization of America, and the current account deficit reached 3.4% of GDP by 1987. . The fall in oil prices, presumably, began to fix the problem after that, and with the help (again) of a recession, Bush I eliminated the current account deficit in 1991. But it recovered and reached about half of the Reagan-era record in the mid-1990s before exploding in the last Clinton years to reach 4.2% in 2000. Once again a recession reduced it, but only to 3.8% in 2001, and since then it has steadily increased to a new record of 5.7% of GDP in 2004, the last year for which figures are available.

All this is also reflected in our foreign indebtedness, for which the Administration has only released figures beginning in 1997. At that time, our net foreign indebtedness--that is, the surplus of foreign claims on the US over our claims overseas--was about 10% of GDP. It increased to 14% of GDP in 2000 and has been around 20% of GDP for each of the last four years. And this, of course, has caused the dollar to lose about 30% of its value relative to the Euro during the same period.

One further check of the figures has revealed a rather extraordinary discrepancy which I wish someone would explain. With the deficit and national debt exploding, one would expect that government interest payments would be taking up a bigger share of the federal budget. That has not, however, been happening according to Bush Adminstration figures. Net interest payments were 15% of the federal budget in the mid-1990s and had fallen to 11.1% in 2001. They have continued to fall ever since, according to the figures, all the way to 7% in 2004, although they are projected to rise to 9% by 2007. As an amateur economist I don't see how this could be, and I would appreciate any explanation.

This has been a long and detailed post and may not appeal to some of my usual readers. However, I find numbers relaxing from time to time, and I believe these tell a very important story. Paying some attention to national accounts is, as we shall soon discover, one of the costs of citizenship. Undoubtedly figures on the behavior of individual Americans would tell a similarly frightening story as regards debt, and we may have to pay for that too. And in any case, the relative lack of interest in such figures today, as opposed to 40 years ago, is another indication of what has happened to us, and what is likely to happen in the future. Our parents and grandparents had learned the hard way that economic behavior has consequences, and in our youth they protected us accordingly. Few Boomers have ever had to face that fact first hand. The consequences, I think, cannot long be delayed, and they will be serious. It is our children, armed with computers and spreadsheets like the ones I've been using for the last couple of hours, who will make careers analyzing and correcting the next economic catastrophe. While I don't know what it will be, I suspect that it cannot be avoided. In economics as in foreign policy, the Bush Administration will be studied carefully for many years--but not for its successes.


Anonymous said...

Well, frankly, Reagan was a "greatest generation" president, a Reader's Digest president if you will.

The Boomers I know were all raised in post-depression homes, where you closed the door to keep the heat in, used the entire bar of soap, and, frankly, didn't know there was any kind of credit card other than a gas card until we were well into our twenties.

ye olde serial catowner

Anonymous said...

If there is a national economic tragedy concerning these exploding deficits, it will caused by our slavish insistence that "Free Trade" policies must be persued at all costs. A return to the policy of "Revenue Tariffs" especially as concerns our trade imbalances with China, would right our economic ship in short order. We need to extricate ourselves from membership in the World Trade Organization, repeal trade agreements that have proven not to be in our national self interest,such as NAFTA, and look to more rational policies that served us well in the past. Revenue Tariffs are a policy that provided 89% of all Federal Revenue in 1886. The argument is always that these policies were protectionist in a way that was actually harmful. However, there is much difference in a Protective vs. a revenue tariff. We have used both kinds in our history and they were always successful in accomplishing what we needed them to. This was the prevailing economic policy until 1913, when the tax on income was put into place to provide revenue to run the govt. and tariffs were repealed. The argument is always advanced that it was tariffs (Smoot Hawley} that caused the depression of the 1930's to escalate out of control. This argument is always advanced by free traders to silence criticism of their policies. but it was not Smoot Hawley that was to blame, but a decision by the Hoover Administration to put a moratorium on federal spending for all public works projects that exacerbated the problem. We import fully 47% of all of China's manufactured goods tariff free. They in turn manipulate their currency to keep it undervalued. Placing a 20% revenue tariff on all imports from China alone would significantly reduce our federal deficits. If we extended that idea and levied tariffs on all goods imported that we don't produce domesticaly , we could probably eliminate the deficit completly in a relatively short time. We might even, in the future, be able to eliminate the confiscatory tax on income. P.S. Concerning the removing of our nation from the "Gold Standard". That happened under Richard Nixon's watch. We tend to think that Watergate was the worst of his incompetencies when in actuality, if he was to be impeached for anything, it should have been for taking us off the "Gold Standard". P.P.S. I much enjoy your essays. said...

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