It’s the total debt, not the deficit, that matters

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This chart, which first appeared in the Washington Post, is seriously flawed, but still informative.  The flaws are:

• The color code for the House of Representatives is off.  Red, not blue, represents Democratic majorities; blue, not red, represents Republican majorities.  The color code for the Senate and for Presidential administrations is consistent with the key of red for Republicans, blue for Democrats
• Party responsibility should be moved a year to the right.  Fiscal 2009, which began Oct. 1, 2008, was the last budget of the George W. Bush administration; fiscal 2001, which began Oct. 1, 2000, was the last budget of the Clinton administration; and so on.  Nearly every chart showing the history of federal taxes and spending makes this mistake.

Nevertheless, the chart is important because it shows that the size of the total government debt, not the size of the annual deficit, is what matters.  The government’s annual deficit was slightly lower in 2010 than in 2009.  How much that was due to President Obama and how much to the economy, I can’t say.  Nevertheless, the total government debt went up, as under previous administrations.

There’s something else that’s even more important than the size of the government debt, and that is the size of the debt in relation to the size of the economy.  The United States came out of World War Two with a huge debt that never was paid off, but it ceased to matter, because the economy grew so much in the next 30 years that the debt become less and less important.

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The debt to GDP ratio can be improved by reducing or eliminating the annual government budget deficit, and by growing the economy. Economic growth will help shrink the deficit.  Shrinking the deficit may or may not help economic growth, depending on how it is done.

The federal government does not control the growth of the economy, but there are ways that it can help.  It can rein in reckless speculation by investment banks, so that they return to investing in the real economy.  And it can spend money on things that contribute to economic growth, such as education, scientific research, infrastructure and maintenance of basic services.

There is a fine line to walk.  Spend money on useless things, and you worsen both the government’s financial position and the overall economy.  Refuse to spend money on essential things, and you also stifle economic growth.

It is not enough just to reset national priorities.  The nation needs a more fine-grained examination than just spending more for infrastructure, or less for national security.  It requires a fine-grained determination of what particular infrastructure projects contribute to the functioning of of the economy, what particular military and intelligence activities contribute to the national security—delicate surgery, not amputations.

Click on Signs of the Times for an article by Mark Steyn in National Review on an example of unwise spending.

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I like this chart because it shows that, contrary to the accepted claim, the Clinton administration did not bring the federal budget into balance except for one year.  The basis of the claim is to offset the surplus in the Social Security trust fund with the deficit in the government’s general fund; the reason this is bogus is that the Treasury bonds in the Social Security trust fund are a fiduciary obligation of the government, just like government bonds held by anybody else.

Tags: Debt and GDP, Federal budget deficit, Government, National debt