Money Matters: Debt debate drama - How we got to this point

By Kevin B. Murray The Daily Record Newswire Presumably between when this is written and Aug. 2, Congress and the president will come to some agreement on raising the debt ceiling, and Armageddon will be avoided, at least for now. The political theatre will end briefly, only to renew again as the drama shifts to the next act when the 2013 budget is presented by the president in February. Given the massive news coverage the debt ceiling issue has generated, one might think this a very unusual event. Yet since 1993, the limit has been raised on 16 separate occasions (six under President Clinton, seven under President Bush and three under President Obama). While "facts" rarely get in the way of a good argument, perhaps a little historical information on how we reached this point would be of interest. In our nations early history, the debt was almost exclusively generated during times of war. The Revolutionary War which created our nation, also created our national debt. Following the war, the young nation ran surpluses that reduced the debt by about 80 percent prior to the next war (the War of 1812) whose funding tripled the national debt. The post war year surpluses prior to the Civil War pretty much eliminated the debt. The Civil War financing caused the debt to skyrocket to $22.5 billion. The government ran surpluses in 36 of the next 47 years and paid off more then half of this debt. WWI raised the debt to $22.5 billion, over a third of which was paid off from surpluses in the years prior to the Great Depression. Thus we see a clear pattern -- wartime deficits and peacetime surpluses. It was a period of small government, whose role and expenditures expanded during wars, and then contracted again when they were over. The Great Depression/WWII period changed the size and role of the government forever. Our debt grew from $16 billion to $260 billion during this period, and grew to about 120 percent of our Gross Domestic Product (the highest level it has ever been, considerably higher then we now are). The Post-WWII era saw the role of government, and its debt, ever expanding regardless of which political party was in office. Rather then running surpluses in the post war period, administrations worked to make sure the rate of growth of the debt was below the rate of growth of the economy. In fact, this new way of measuring the debt, not in terms of its absolute size, but rather its size relative to the size of the nation's economy, was accepted by all presidents between 1950 and 1980. Thus the debt as a percentage of GDP fell from 120 percent after WWII to 38 percent in 1980. This drop occurred during the administrations of Democrats (Truman, Kennedy, LBJ and Carter) as well as Republicans (Eisenhower, Nixon and Ford). The period 1980 to 1992, however, saw our national debt grow from $907 billion to $4.1 trillion, and also grow as a percentage of GDP from 31.8 percent to 63.1 percent. The administration of President Clinton, (1992-2000) returned to the pattern seen in 1950 to 1980, of increasing the debt but increasing it less then the increase in GDP, thus reducing the debt as a percentage of GDP from 63.1 percent to 56.1 percent. The last two administrations, those of Presidents Bush and Obama, have seen debt levels grow both absolutely to record levels, and grow as a percentage of GDP (currently just short of 100 percent of GDP) to levels exceeded only by those of the immediate post-WWII period. Currently, we have government spending levels the highest as a fraction of GDP they have been at in over 40 years. Similarly, though probably less well-known, is that tax receipts as a percentage of GDP are lower then they have been in over 40 years. Since the size of the deficit (and thus the addition to our national debt) is simply spending minus taxes, our deficits are enormous. If one accepts that keeping the debt as a percentage of GDP from growing beyond its current levels is important, there are three ways of reducing this key statistic. First and most popular is to grow the economy. The others would be to reduce spending and increase taxes. With unemployment high and economic growth low, cutting expenditures and increasing taxes could both have a negative impact, at least in the short run, on the rate of economic growth. Solutions are not easy, nor will reasonable people agree on what is best. Voltaire is said to have stated "the best is the enemy of the good," if those who disagree as to what is best, cannot agree to compromise for the good of all, we could be in deep trouble in the coming weeks. ---------- Kevin B. Murray, is a vice president at Karpus Investment Management. He can be reached at (585) 586-4680. Published: Thu, Jul 28, 2011