David R. Henderson  

Obama's Debt Tsunami

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I held off posting on this because I thought the press and the bloggers would be all over it. But one of the most shocking things is how little attention has been devoted to the huge increase in the federal debt if President Obama gets his way. As someone said, prediction is difficult, especially about the future. Nevertheless, we need to try. And the Congressional Budget Office (CBO) has tried. In March, the CBO published its comparison of the Obama budget proposals with the baseline. The baseline takes as given current law, and current law includes the assumption that laws that are set to expire will expire. So, for example, the CBO baseline includes the assumption that the Bush tax cuts will expire. Also, because the Obama "stimulus" bill is now law, that's also priced into the base line. Those facts are what make the Obama budget all the more striking.

Here are the most striking facts, and if you want more details, you can look at CBO's tables.

In 2008, the net federal debt as a percent of GDP was 40.8 percent. By 2019, it would have risen, under current law as defined above, to 56.1 percent of GDP. Under the Obama budget, it would double to 82.4 percent of GDP, a whopping 47 percent increase from the baseline.

I should add that virtually everyone expected current law not to be the relevant baseline because whoever won the election, the Bush tax cuts for people who are not high income would have been extended. This revision of the law accounts for roughly $2 trillion of the approximately $5 trillion addition to the national debt, with increased spending accounting for the other $3 trillion.

The numbers are troubling for two reasons. First, they're scary, given the even bigger deficits we can expect in the next few decades due to Medicare, Medicaid, and Social Security. Second, while Keynesians tend not to worry about big deficits during large recessions, they generally have worried about big deficits during normal years. Have you seen many Keynesians worrying about this? Can Christina Romer, for example, be feeling sanguine? Now you might argue that she can't talk about this because she gave up her independence when she entered the Obama administration. But what about Keynesians who have their independence? What about Bob Solow? Alan Blinder?


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CATEGORIES: Fiscal Policy



COMMENTS (28 to date)
Lee Kelly writes:

Although they will be taking your money tomorrow (probably with inflation), they will be taking your resources today. It is today's squandering of resources that will make the future poorer, the later inflation will merely register the losses that will have already occurred.

Mike Moffatt writes:

"In 2008, the net federal debt as a percent of GDP was 40.8 percent. By 2019, it would have risen, under current law as defined above, to 56.1 percent of GDP. Under the Obama budget, it would double to 82.4 percent of GDP, a whopping 47 percent increase from the baseline."

So in 12 years, the debt to GDP ratio would double.

"First, they're scary..."

Why should Republicans be scared by this? It is *exactly* what happened in the 12 years of Reagan/Bush Sr! And I'll note Republicans still have a pretty high opinion of the former of the two.

Obama is doing an alarmingly good impression of Reagan's first term, and he's getting slammed for it by the right.

For the record, I'm against these high deficits and I have been for years, regardless of the affiliation of the guy in power.

Lee Kelly writes:

David Henderson is a Republican?

Mike Moffatt writes:

"David Henderson is a Republican?"

I have no idea. I suspect, though, that the vast majority of his readers are. Even if they're of the "it's not my fault, I supported Ron Paul" variety.

David R. Henderson writes:

Dear Mike Moffat,
Let me get this straight. Because George Bush had crumby policies that I forthrightly opposed, I should not oppose Obama when he doubles down on Bush's crumby policies. And the reason is that the people who read me, according to you, are Republicans, albeit ones who, still according to you, are of the pro-Ron Paul variety. I'm guessing you know what a strong opponent of high taxes and spending Ron Paul was and is. He opposed most of what Bush did. I don't get your point.
Best,
David

Tom Church writes:

Mike,

Please don't make blanket comments like that. EconLog has an large and diverse readership, politically and economically.

Anyway, for some context, have a look at: http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms

David R. Henderson writes:

Dear Tom Church,
Thanks on two counts:
1. For reminding us to stick to the issues rather than trying to speculate on the readership, and
2. Giving a valuable link. Isn't the net wonderful?
Best,
David

Mike Moffatt writes:

"Because George Bush had crumby policies that I forthrightly opposed, I should not oppose Obama when he doubles down on Bush's crumby policies."

Fine - then call it the "Bush-Obama Debt Tsunami".

Your post gives the impression that this is some evil Democrat plot, whereas Obama is following the same increase in debt-to-GDP that Reagan did in '80-'81, Bush Sr. did in '90-'91, Bush II did in '01-'02 and '08.

I should have written "if even SOME of them are it's not my fault..." Mea culpa.

My point is this - I have been speaking out about this for years. For half-a-decade. Back when the debts were during a boom and a lot less justifiable. Do you want to see some of the e-mails I got from Republicans? How debts were okay because of 'starve the beast'? How that 'don't you understand.. we're at war?!?' How that I was just a Democrat hack trying to find fault with a great President.

I can only imagine the e-mail a high profile guy like Bruce Bartlett got!

My point is this - the right side of the blogosphere was been awfully quiet about this stuff during most of the decades. I'm glad people are finally showing up to the party. I'm just curious what is taking people so long, particularly as, so many are claiming, that it is not a partisan thing.

David R. Henderson writes:

Dear Mike Moffat,
I'm not responsible for what other people say or write, as I'm sure you must realize. And the reason for focusing on Obama is that he's doing this and, as I wrote, the reaction seems to be muted. Moreover, as I wrote, Keynesians would have been, I thought, upset about this, just as they were upset about Bush's policies.
David

Mike Moffatt writes:

"Moreover, as I wrote, Keynesians would have been, I thought, upset about this, just as they were upset about Bush's policies."

I'm not a Keynesian, but naturally I sympathise with their position here.

As you stated, there's a world of difference between running a large deficit during the worst economic downturn since the Great Depression (Obama) and running large deficits during booms (Reagan, Bush Sr., Bush Jr.)

And as you also stated, it is hard to predict the future. But what lessons can we learn from the past? In the admittedly very small sample size of the last 30 years, Democrats reduce debt-to-GDP ratios in good times (Carter, Clinton) whereas Republicans raise them (Reagan, Bush Sr., Bush Jr.).

So why should Keynesian be worried about something that a) hasn't happened yet and b) recent history shows us is a lot less likely to happen if a Democrat is President?

Yes, you are only responsible for what you write. But if you're going to call Solow, Blinder, etc, out for being silent for something that, I repeat, has not happened yet, it seems unfair to complain when people question why you and intellectuals associated with the right were silent when the same issue already occured.

David R. Henderson writes:

Mike Moffat,
You keep repeating the claim that I was silent about Bush and his horrible policies. Do your homework. Start with this:
http://antiwar.com/henderson/?articleid=11757
David

Mike Moffatt writes:

Thanks for the link - I must admit I had not seen it. I have read all your writings on EconLog and have not seen you critize the deficits under Bush.

Do you pieces about spending and deficits under Bush? If you were 'fighting the good fight' all this time, then I do apologize.

That being said, you could do us the favor of mentioning that in your pieces about Obama. I see a whole lot of criticism of Democrats and Democrat-affiliated economists. What I don't see is any acknowledgment (in the articles), that this is, at absolute worst, more of the same.

Mike Moffatt writes:

That should be 'do you HAVE pieces about spending and deficits under Bush?'

8 writes:

As you stated, there's a world of difference between running a large deficit during the worst economic downturn since the Great Depression (Obama) and running large deficits during booms (Reagan, Bush Sr., Bush Jr.)

Numbers matter. If the national debt doubles from 2% to 4%, then it's not even really worth thinking about. I think you can blame some of this on Reagan and Bush and the Republicans, because albeit for a brief moment during the Republican Revolution, the GOP has allowed big deficits.

You can blame them, and Congressional Democrats, (basically the whole political class) for creating a culture of deficits. It is Obama who is taking it to the potentially destructive extreme though. Economists were wrong about: how long deficits could last and how big they could become. They are not wrong, at the extreme, in their advice. This will end very, very badly.

Daniel Klein writes:

Eye witness account of Henderson's preference in the 2004 election:

I invited Henderson to speak at Santa Clara University in the Fall of 2004, just prior to the election.

He unequivocally said he would prefer Kerry to Bush. He explained his reasons to an audience of 200.

Mike Moffatt writes:

David,

Going over your articles on antiwar.com and reading Daniel's comments - I owe you an apology.

Again, I do wish that you would post these things out on your current posts. But I was clearly wrong for suggesting that you had not been discussing this in the past.

Mike Moffatt writes:

"If the national debt doubles from 2% to 4%, then it's not even really worth thinking about."

The real numbers are 32.6% to 66.2% under Reagan/Bush (source: http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms). That is not an insignificant amount.

"I think you can blame some of this on Reagan and Bush and the Republicans, because albeit for a brief moment during the Republican Revolution, the GOP has allowed big deficits."

I wouldn't call the time between the retirement of Calvin Coolidge (who I am a big admirer of) and today 'brief'.

Sheldon Richman writes:

That anyone would entertain, for even a nanosecond, the possibility that David Henderson would sacrifice his integrity (e.g., as an economist) to some other consideration (e.g., partisan politics) is truly laughable.

PJens writes:

If republicans and democrats both despise debt and deficits, why do they keep creating more?

We need to vote in better politicians!

David R. Henderson writes:

Thanks, Sheldon and Dan. Actually, to put my talk at Santa Clara in perspective, I titled it, "A Free-Market Economist's Case Against the Iraq War, Bush, and Kerry--In that Order." It wasn't a case for Kerry; rather, it was a case that Kerry was horrible but not as horrible as Bush, as listeners to my talk can attest.

And to Mike, I accept your apology.

Ironman writes:

Y'all mind if I step in here, or as the case may be, step in it?... ;-)

It's not the size of the national debt in itself that matters very much. You also have to consider how much growth there is to support it as well as how many people there are to absorb the load (let's call that the debt burden per capita.)

Charting that relationship over time, you can clearly see that debt loads spike upward during periods of national crisis. By that measure, the new debt proposed by President Obama would hike the level of national debt to levels consistent with those of President Roosevelt during the Great Depression. The key difference here is that the debt burden, defined as the ratio of national debt to GDP, would be more than double that of Roosevelt's era, which indicates that the American people would be much less able to absorb a significant shock (such as World War 2).

Now, something interesting happens when we map the debt burden per capita against the maximum income tax rates established in each year since 1913. We find that there's a relationship that describes a kind of political equilibrium between the two. The further the national debt burden per capita moves away from that "equilibrium," the more likely it is that a major revision in income tax rates is in the offing.

The chart included in the link above shows three significant periods where this has happened:

1. The runup to World War I, where income tax rates were hiked prior to the accumulation of debt.

2. President Kennedy's tax cut of 1963, which occurred after the national debt burden per capita had dropped significantly following World War 2.

3. President Reagan's tax cut of 1981, which increased the national debt and lowered income tax rates in a way that satisfied the long-term political equilibrium.

Why the national debt is becoming a problem now has to do with the projected trend. Through 2008, we see a rising national debt burden per capita, but not one that has moved that far away from the long term equilibrium relationship that has been established. If we account for Obama's increases in the national debt (which increase the national debt burden to 3.0 in 2009) and even if we incorporate the planned maximum income tax rate to 39.6% to 2009, we see that would put the relationship between these two things far away from the historic level of equilibrium. That indicates large tax hikes are in the very near future.

That the middle class will be bearing the brunt of the increased taxation is perhaps something that's also being lost in the discussion.

Ultimately, it's the combination of the sharply increased risk of not being able to deal with a significant shock, combined with highly likely tax increases to support what largely appears to be hugely wasteful spending that most people find upsetting these days.

Victor writes:

Obama's debt-to-GDP increase is planned and assumes that the Rosy Scenario happens, on top of that.

I'd like someone to visit a Fed Depository Library and get a copy of Reagan's first budget projections. My recollection is that it, too, assumed a Rosy Scenario would occur. But if Rosy Scenario did happen, the debt-to-GDP ratio was expected to fall dramatically. Of course, the economy was tanking rapidly thereby shattering his budget projections within a year. Or so I recall.

Comparing Reagan post-hoc result to Obama's a priori goal is likely misleading. Especially since this is Obama's *goal* and he also has a strong working majority to accomplish this.

Greg Ransom writes:

I'm repeately shocked at how naive classic liberals are about the true character of today's press corp, and how naive they are about Obama's intellectual background as a life-long member of America's hard leftist sub-culture. Obama isn't just a smile on your TV set. He's a man who soaked his whole life in the ideas of the left. The press core is happy about having a leftist in power, and they are out supporting him and running cover for him -- make sure to protect the public from the facts.

David wrote:

"I held off posting on this because I thought the press and the bloggers would be all over it. But one of the most shocking things is how little attention has been devoted to the huge increase in the federal debt if President Obama gets his way."

Greg Ransom writes:

Didn't Milton Friedman and the "supply siders" tell us that none of this mattered.

Classical liberals are intellectually disarmed because of the flawed thinking -- and mistaken political calculations of Friedman and the supply siders. Friedman flaw was that he had no heterogeneous production and investment in his economics -- and scratch most of the "supply siders" and what you found inside was a vulgar Keynesian. I could name names.

David wrote:

"In 2008, the net federal debt as a percent of GDP was 40.8 percent. By 2019, it would have risen, under current law as defined above, to 56.1 percent of GDP. Under the Obama budget, it would double to 82.4 percent of GDP, a whopping 47 percent increase from the baseline."

Bob Murphy writes:

Mike Moffatt, please also remove the Mises Institute from your list of right-wing hypocrites. I am not denying that they exist, and I am sympathetic to liberals who claim the "tea parties" would never have occurred if McCain had won, but please don't lump us all together. E.g. here is a scathing critique I wrote of Larry Kudlow's nonsense defending the deficit in 2004.

Under Bush, I received emails from Republicans saying I should move to France and that I would be butchered by terrorists because of my stupid views (or sometimes by illegal immigrants from Mexico, depending on the emailer).

And now under Obama, I receive emails from Democrats complaining that my support of torture and foreign conquest has ruined the country and my credibility, etc. Oh I'm also a racist and can't stand a black man in the White House.

Last point: I appreciate that you actually apologized to David. I think that is the third (non-sarcastic) Internet apology I have ever witnessed. Bravo!

Alex J. writes:

Greg Ransom,

Friedman wrote that the level of spending was what mattered. The resources used now are the same regardless of whether they're paid for with taxes or debt.

The Snob writes:

1. I'd like to see the budget comparisons with defense spending broken out separately. Unlike entitlement programs, defense spending does actually get significantly cut on occasion. I bet Reagan at least would look a lot better in this light.

2. Speaking of which, I'd love to see a BRAC for non-military programs. Does the Bureau of Indian Affairs really serve any other purpose than to print checks for people? Couldn't we get ADP to do the same thing for a lot less? I might be more open-minded about new government if we got a little better at killing off old government.

3. It's also worth remembering that Reagan, Bush I, and Clinton spent all or most of their terms fighting against hostile Speakers of the House. Bush II needs a better excuse.

4. Intent matters with deficits too. Reagan's deficits helped buy the end of the Cold War, while Obama's may buy us some kind of social-democratic USA 2.0. I'd oppose Obama's proposal on the basic principles alone. The fact that he's proposing to charge it to our TreasuryCard only makes it more noxious.

George writes:

Snob: You're so old-fashioned. Nowadays, it doesn't matter what you spend money on, it only matters that it be spent.

Money stimulates the economy, you see. And if you run the money through the government, it stimulates even better. I'm off to dig me up a few bottles....

More seriously, why doesn't the government use all that borrowing to just give us each a check again — even bigger than last time? They know we're good for it: they already garnish our pay. Is it that we'd do something dumb with it, like get out of household debt? (This is not an entirely rhetorical question: I'm mostly looking for some rational economic reason, but the self-interest-of-the-governing-class explanation always bears discussing.)

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