Our DR reached 122% during WW II, leaving us with a ND
equivalent to over twice our current ND. But we never
reduced it by a single penny! There was a brief spike of
inflation after the war, but it remained low until the war
against Vietnam in the '60s and the oil embargo in the
'70s. But, with annual budget deficits and steadily
increasing ND during the next 35 years (under seven
Presidents), our economy simply grew out of its debt.
Despite top tax rates from 70% to over 90%, the GDP grew
steadily and, by 1980, the DR had declined to a much “too
low” 32.5%!
President Reagan (1981-1988)
& President Bush (41) (1989-1992)
As President Carter left office (1980), "stagflation" was
rampant. This was caused by an oil embargo that
simultaneously increased price levels and reduced the GDP.
Federal Reserve Chairman Paul Volcker, appointed by
Carter, raised the prime interest rate up to 20% to kill
the inflation. This painfully slowed the economy more but
did stop the inflation.
Kevin Drum has a word to say in the Mother Jones magazine
about the Reagan era, including this excerpt:
”The American economy is highly sensitive to oil
prices, and after peaking at around $100 per barrel
during the Iranian revolution (in inflation
adjusted terms), oil prices steadily dropped,
falling below $30 in 1986 (again, in inflation
adjusted terms). This was largely due to
(a) reduced demand thanks to the recession;
(b) reduced demand thanks to CAFE standards and
other conservation/efficiency improvements that
followed the oil shocks of the '70s;
(c) increased oil supply from Prudhoe Bay, which
peaked in the early '80s; and
(d) increased oil supply thanks to a Jimmy Carter
executive order ending price controls on oil.
Again, Ronald Reagan had very little to do with it.
”What else? Well there was enormous deficit
spending in the early '80s that wasn't offset by
Fed action, and that probably stimulated the
economy a bit. That was Reagan's doing, though
it's not something his fans like to boast about
today. And there was the Plaza Accord of 1985,
which devalued the dollar and helped spur
exports. That was also Reagan's doing, but again,
it's not something his admirers say much about
today, since modern tea party orthodoxy insists
that this amounts to "debasing" the dollar.“
With complaints about budget deficits that were actually
less than 2% of the GDP, Reagan began our on-going class
war, aiming to reduce the top income tax rates and shift
more of the tax burden onto the middle class.
Based upon Reagan’s “supply-side” or “trickle down”
theory that lower tax rates for the wealthy would increase
tax revenues, Congress enacted the 1981 Kemp-Roth tax
cuts. Among other changes, the top income bracket was
reduced from 70% to 50%.
Dr Paul Samuelson, the first American to receive the Nobel
Prize in economics, warned the public against Reagan’s
proposals (Newsweek, March 2, 1981):
“A radical-right crusade is being sold
as a solution for an economy allegedly
in crisis. There is no such crisis!
Our people ... should not be flim-flammed
by implausible promises that programs
to restore the 1920s’ inequalities
will cure the inflation problem.”
As Dr Samuelson predicted, Reagan’s theory flunked.
Revenue declined 25% while military spending tripled the
annual budget deficits. Including the term of Bush
(41), the ND jumped from $1T to $4T and the DR doubled to
66.1%.
Of course, with the stimulation by the increased money
supply due to reduced taxation and increased military
spending, the GDP and tax revenue increased. Stimulus
works!
As to whether lowering tax rates causes a tax revenue
increase, much has been written and said. In fact,
economic measurements are highly dependent upon extraneous
factors such as population growth, inflation, and
especially the business cycle, which does not conform to
presidential administrations. But if we examine the annual
rate of growth of real (inflation-adjusted) tax revenue
per capita measured from business cycle peak to peak over
some cycles, we find the following data:
1973-1979: 2.7% (Nixon & Carter)
1979-1990: 1.8% (Mostly Reagan)
1990-2000: 3.2% (Mostly Clinton)
2001-2007: 0.0% (G.W.Bush)
Apparently, Dr. Samuelson knew his business.
The 1983 Federal Insurance Contribution Act (FICA) payroll
tax increase was enacted to provide sufficient Social
Security retirement benefits to last the “baby-boomers”
until 2047. But instead of being put into a “lock-box”,
the funds were co-mingled with general revenue and have
since been spent by every President for tax cuts, wars, etc.
Some observers actually attributed the revenue increase to
Reagan’s tax cut!
To confuse the public, defict hawks have conflated the
Social Security Trust Fund with “surplus” when they want a
tax cut and with “debt” when they want a spending cut. In
fact, the Trust Fund has nothing to do with either. By
law, Social Security benefits can be paid only from fund
income plus interest. The Trust fund payments cannot
possibly add to the ND. This subject will be discussed
again in nother lecture.
Justified by eliminating tax loop-holes, the 1986 Tax
Reform Act further reduced the top income bracket to 28%.
But since then, lobby "contributions" to legislators have
magically restored the loop-holes. The latest word
(Bowles-Simpson plan, December, 2010) is that by again
eliminating the restored loop-holes, the top bracket could
once more be cut in half. Apparently, the scam works once
every generation. With enough bribery, the lobbies will
eventually get their "flat" tax: the same rate for rich
and poor.
Sitting back and allowing the Savings & Loan industry to
collapse was not Reagan's most costly mistake. That would
be the 1986 Drug Law that is still giving us much pain.
A problem with addictive drugs, miniscule compared to
the death and destruction caused by legal alcohol and
tobacco, was converted into a disasterous program of
incarceration, costing a trillion dollars and wasting
millions of lives over three decades. And we are still
counting: with 5% of the world's population, our prisons
hold 25% of the world's convicts.
President Clinton (1993-2000)
In an interview with Amy Goodman back in August of 2008,
the author Thomas Frank made the following observation:
"But the most insidious one, the most insidious scheme
for permanence, the one that really strikes me, is the use
of deficit spending by the right. OK, now,I don’t have a
problem with deficit spending. You know, it’s — liberals
have used it for decades very effectively. You know, it’s
— if you’re a Keynesian — you know, it’s one of the tools
that you use to, say, you know, get the country out of a
recession or, you know, build low-income housing, or
whatever it is that you want to do with the state, right?
So, but the conservatives got into power in the early 1980s,
and they’re handed this tool, the big old — you know, the
power tool of deficit spending, and I’ll be damned, they
run that sucker right into the ground, you know, and pile
up the biggest deficit anyone has ever seen, short of, you
know, World War II. And what that does, that leaves the
next administration to come along, which happened to be
Bill Clinton, leaves him with this colossal Everest of
debt that he has to deal with.
"Amazingly, Thomas Frank predicted that the course of
Obama's presidency would be the same as Clinton's!"
Clinton raised the tax rate and reduced the DR to
Greenspan's “too low“ 56.4%. As the Cold War ended (1991),
military spending declined. There was also a considerable
technology boom. The combination of higher taxes, more
revenue, and less spending reduced the deficit.
By using the FICA revenue, Clinton was able to declare
budget surpluses in 1997 and 1998. In 1999, we had the
only budget surplus independent of FICA funds in the last
35 years.
In fact, with less spending, higher taxes, and more
imports, money was being drained from the economy. Wages
were stagnant, poverty was rampant, and inequality grew.
The "dot.com" boom was about to bust.
President Bush (43) (2001-2008)
Using the FICA “surplus” to justify two tax
cuts, Bush effectively looted the Social Security Trust
Fund. The insurance premiums paid into the fund, mostly
by the middle class, were given mostly to top-bracket
taxpayers. Political contributions are the best investment!
With those tax cuts and with two unfunded Mid-East wars,
an unfunded prescription drug benefit, and the Troubled
Asset Relief Program (TARP) bailouts, Bush added $5T to
the debt and raised the DR to 83.4%.
As Bush was in the last months of his presidency, the
economy collapsed, This will be discussed in the next
lecture.
President Obama (2009- )
In the midst of the meltdown, the GDP and tax revenue were
plummeting and the economy needed an explosion of
emergency expenditures for stabilization and recovery from
the worst global financial and market collapse since the
Great Depression.
During a recession, tax revenue declines abruptly while
recovery expenses increase drastically. Hence, huge
deficits are unavoidable. Complaints about excessive
spending are distractions intended for the gullible.
At mid-year 2011, after 2 1/2 years of Obama's term, these
were the debt statistics (from the first reference below):
ND: $14.5T
GDP 14.8T
DR 98.0%
Summary
Historic values of the DR were obtained here.
(Wikipedia:US Debt, Presidential Terms.)
US debt history can be found here. (Treasurydirect.gov)
The following is a table abstracted from the first link
above:
DEBT HISTORY BY PRESIDENTIAL TERM
PRESIDENT
TERM
ND INCREASE
ENDING DR
DR CHANGE
Carter
1977-1980
$ 0.280 T
32.5 %
- 03.3 %
Reagan
1981-1984
$ 0.660 T
43.8 %
+ 11.3 %
Reagan
1985-1988
$1.040 T
53.1 %
+ 09.3 %
Bush (41)
1989-1992
$1.400 T
66.1 %
+ 15.0 %
Clinton
1993-1996
$1.180 T
65.4 %
- 00.7 %
Clinton
1997-2000
$0.450 T
56.4 %
- 09.0 %
Bush (43)
2001-2004
$1.730 T
63.5 %
+ 07.1 %
Bush (43)
2005-2008
$ 2.620 T
83.4 %
+ 20.0 %
Of the total ND, the Treasury owes almost $5T to the
Social Security Trust Fund and other insurance programs.
Funds approximating this total were “returned to the
taxpayer” by the Reagan and Bush tax cuts with the
claim that these funds were surplus!
In effect, wealth, in the form of premium payments (paid
mostly by middle class premium payers), was redistributed,
in the form of tax cuts (paid mostly to the upper bracket
tax-payers). Political contributions are the best investment!
The deficit hawks now claim we have a spending problem.
No! Because of a maldistribution of income and wealth, we
have a demand shortage that results in an unemployment increase
that leads to a tax revenue shortage that looks like a deficit
that could become a debt problem if we don't reverse the
maldistribution-of-income-and-wealth problem.
That is our debt history to date. The following lectures
will describe our possible paths going forward.
Proceed to: Lecture 15. RECESSION & RECOVERY
Thanks for your interest.
Marvin Sussman, retired engineer
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With complaints about budget deficits that were actually less than 2% of the GDP, Reagan began our on-going class war, aiming to reduce the top income tax rates and shift more of the tax burden onto the middle class. Based upon Reagan’s “supply-side” or “trickle down” theory that lower tax rates for the wealthy would increase tax revenues, Congress enacted the 1981 Kemp-Roth tax cuts. Among other changes, the top income bracket was reduced from 70% to 50%. Dr Paul Samuelson, the first American to receive the Nobel Prize in economics, warned the public against Reagan’s proposals (Newsweek, March 2, 1981): “A radical-right crusade is being sold as a solution for an economy allegedly in crisis. There is no such crisis! Our people ... should not be flim-flammed by implausible promises that programs to restore the 1920s’ inequalities will cure the inflation problem.” As Dr Samuelson predicted, Reagan’s theory flunked. Revenue declined 25% while military spending tripled the annual budget deficits. Including the term of Bush (41), the ND jumped from $1T to $4T and the DR doubled to 66.1%. Of course, with the stimulation by the increased money supply due to reduced taxation and increased military spending, the GDP and tax revenue increased. Stimulus works! As to whether lowering tax rates causes a tax revenue increase, much has been written and said. In fact, economic measurements are highly dependent upon extraneous factors such as population growth, inflation, and especially the business cycle, which does not conform to presidential administrations. But if we examine the annual rate of growth of real (inflation-adjusted) tax revenue per capita measured from business cycle peak to peak over some cycles, we find the following data: 1973-1979: 2.7% (Nixon & Carter) 1979-1990: 1.8% (Mostly Reagan) 1990-2000: 3.2% (Mostly Clinton) 2001-2007: 0.0% (G.W.Bush) Apparently, Dr. Samuelson knew his business. The 1983 Federal Insurance Contribution Act (FICA) payroll tax increase was enacted to provide sufficient Social Security retirement benefits to last the “baby-boomers” until 2047. But instead of being put into a “lock-box”, the funds were co-mingled with general revenue and have since been spent by every President for tax cuts, wars, etc. Some observers actually attributed the revenue increase to Reagan’s tax cut! To confuse the public, defict hawks have conflated the Social Security Trust Fund with “surplus” when they want a tax cut and with “debt” when they want a spending cut. In fact, the Trust Fund has nothing to do with either. By law, Social Security benefits can be paid only from fund income plus interest. The Trust fund payments cannot possibly add to the ND. This subject will be discussed again in nother lecture. Justified by eliminating tax loop-holes, the 1986 Tax Reform Act further reduced the top income bracket to 28%. But since then, lobby "contributions" to legislators have magically restored the loop-holes. The latest word (Bowles-Simpson plan, December, 2010) is that by again eliminating the restored loop-holes, the top bracket could once more be cut in half. Apparently, the scam works once every generation. With enough bribery, the lobbies will eventually get their "flat" tax: the same rate for rich and poor. Sitting back and allowing the Savings & Loan industry to collapse was not Reagan's most costly mistake. That would be the 1986 Drug Law that is still giving us much pain. A problem with addictive drugs, miniscule compared to the death and destruction caused by legal alcohol and tobacco, was converted into a disasterous program of incarceration, costing a trillion dollars and wasting millions of lives over three decades. And we are still counting: with 5% of the world's population, our prisons hold 25% of the world's convicts.
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