Sunday, February 19, 2012

Putting Obama's deficits in perspective


I offer this chart in the hope of clarifying the ongoing controversy over how much federal debt was accumulated during past presidencies. Each bar represents the Federal debt burden at the beginning and end of each presidency, and the bars are added together in cumulative fashion. As should be readily apparent, in his first four years of office Obama will have added considerably more to our federal debt burden that any post-war president. (The Federal debt burden reached an all-time high of more than 100% of GDP at the height of WW II, then declined steadily through the early 1970s.)

Lest I be criticized as too partisan, I note that Clinton achieved the largest reduction in our debt burden of any president since the 1950s.

My assumptions: For Federal debt I use the amount of debt held by the public, not total debt (which includes debt the federal government owes to itself, e.g., to social security). I have compared federal debt outstanding to nominal GDP at the end of each calendar quarter immediately following a president's assumption of office: thus, Bush II starts in Mar. '01 and ends in Mar. '09. I do this in order to give a new president a month or two to get his feet on the ground, and to credit outgoing presidents with the policies they set in motion before they left. Also, this allows me to use data which is only available on a quarterly basis. I reject the notion that an incoming president must necessarily shoulder the policy burdens of the outgoing president, and in this regard I note that there have been several sizable reversals in the chart above (e.g., Clinton inherited a rising debt burden but managed to reverse that in significant fashion, while Bush II did just the opposite). Finally, I consider debt outstanding as a % of GDP to be the best measure of our national debt burden, since it adjusts for growth in the economy and inflation.

In order to project the federal debt burden as of Mar. '13, I assume that the federal deficit in the 15 months prior will be an annualized $1.2 trillion, and that nominal GDP will grow by an annualized 5%. I believe these are conservative assumptions for the purpose of this analysis; the OMB is projecting a higher deficit and there are many analysts projecting slower GDP growth. A bigger deficit and slower GDP growth would obviously result in a much larger increase in the debt burden than shown here.

Finally, I note that Obama's contribution to our debt burden during his first term is likely to be about 25.6% of GDP, while the next biggest post-war contribution came during two terms of Bush II (15.3%). If Obama wins a second term and the economy and fiscal policies evolve along the lines currently projected by OMB, Obama could end up adding more to our debt burden that all past presidents combined, and almost as much as was taken on to fight WW II—a highly dubious distinction, needless to say.


The chart above gives some long-term perspective on debt burdens and interest rates. Note how there is no evidence at all that higher debt burdens lead to higher interest rates, or vice versa (if anything, the correlation appears to be negative). The same can be said for Japan, where the government's debt burden is well in excess of 100% of GDP, yet interest rates are even lower than in the U.S.

37 comments:

Benjamin said...

Excellent review by Scott Grannis, except he fails to mention monetary policy.

There is no evidence that deficits work to boost GDP, unless accommodated by monetary policy.

And monetary policy alone would be more effective.

Japan has tried the deficits and tight money route for 20 years, an epic failure. Wages have fallen by 15 percent, industrial output has fallen by 20 percent, and stock and property markets have fallen by 75-80 percent in Japan in their 1992-2012 tight money era. The yen has appreciated. Whoopy-doo for the strong yen. We see how little a strong currency is worth.

Sadly, liberals want deficits and GOP'ers want tight money.

The right course---an aggressive bullish monetary policy and a roughly balanced federal budget is an orphan, except for a growing school of Market Monetarists.

I encourage everyone to join the Market Monetarism movement. See the Wikipedia entry.

Jake said...

So because Bush ended his presidency just three and a half months after Lehman went under and the financial crisis started, all that debt that resulted in the 3 1/2 year since should fall on Obama's shoulders?

Dr William J McKibbin said...

The good news is that Federal budget will be cut in coming years, one way or another -- what is needed is at least a 40% cut in both social and defense spending -- that's what needed, and so far, I don't see any presidential candidates seeking those goals except Ron Paul -- anyone who stands for anything less than 40% cuts in both social and defense spending is just another government "big spender" as far as I am concerned -- that applies to voters as well -- we need to cut government, period...

Dr William J McKibbin said...

PS: One way to cut government spending is to restrict government jobs to only the uniformed professions -- that applies to politicians as well -- anyone working for the government in a non-uniformed role would become a volunteer, including politicians, teachers, and everyone else -- an advantage of restricting government jobs to uniformed roles is that the public will be able to see who works for the government instantly -- any job that does not require a uniform should be outsourced to private enterprise -- no exceptions...

William said...

LIPPER FUND FLOW REPORT
(this includes ETFs)

4th Quarter 2011 -
Equity Funds Outflows of $41 Billion
Taxable Bond Funds Inflows of $40.4 Billion

Entire Year of 2011 -
Equity Funds Outflows of $50.4 Billion
Taxable Bond Fund Inflows of $178 Billion

Structuredsettlement said...

January Producer Price Inflation was lower than expected, but the core version was higher than expected. Nothing scary here, thank goodness, but on balance, inflation at the producer level is running at a rate around 3.5% per year. As the second chart shows, this is roughly the level of inflation that we have seen for the past 8 years, and it is about twice the rate that we enjoyed throughout most of the 80s and 90s. sell structured settlement

John Short said...

President are rarely responsible for a higher GDP. If you have the same graph in absolute Debt percentages,you'll see Reagan trippled national debt, Bush doubled it, and Obama 1,5'd it. Reagan > Bush > Obama so far.

brodero said...

Household debt service PLUS Govt. debt service to
GDP is 11.3%.....a 30 year low.... This fact is never
Talked about never mentioned and as a result any
Study of our debt to GDP problem must be deemed
Incomplete....

brodero said...

P.S...the alltime high was 14.1 in the 1q 1991...

blackvegetable said...

What about structural deficits?

I reject the notion that an incoming president must necessarily shoulder the policy burdens of the outgoing president,

oh....you "reject" them.....

Brilliant!

Junkyard_hawg1985 said...
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Junkyard_hawg1985 said...

Scott,

I had looked at this last year going back to 1900. I broke it down into three cases since deficits are a combination of both the work of the legislative branch and the executive branch: 1) Full Democratic Control, 2) Split Control, and 3) Full Republican Control. Here are the cumulative changes since 1900 for all three cases (updated to include 2011):

1) Full: Democratic Control +75.7%
2) Split Control: -1.6%
3) Full Republican Control: -15.2%

I also looked at control of the House of Representives since all spending and revenue bills must originate there:

Democratic Control: +96.6%
Republican Control: -42.3%

Finally, I put in a one year offset to account for the fact that the budget for any given year should have been passed the previous year during the election. Here are the numbers:

Democratic Control: +107.6%
Republican Control: -48.7%

I'll be glad to send you the excel spreadsheet if you are interested.

Andy from Beaverton said...

Public debt was $6.3 trillion when Obama was sworn into office on 1/20/2009.
Public debt is $10.6 trillion as of 2/15/2012.
By the end of Obama's first term in office, public debt will be approaching $12 trillion, almost doubling the public debt.

When George W. Bush was sworn into office in 2001, the public debt was about $3.5 trillion. It took almost eight years to run up $2.8 trillion. It took Obama less than 22 months to run up the same public debt as GWBush.

William said...

Junkyard_hawg1985 would you kindly post the breakdown since WWII which will eliminate the distortions of WWI, the Great Depression and WWII ?

Say since 1950 which would "normalize" for those horrific events. Seventy years of modern times would be useful I think. Thank you.

William said...
This comment has been removed by the author.
William said...

Andy from Beaverton, your figures are not accurate - not even close.

Just Before Bush I Election:
09/30/2000 $5,674,178,209,886.86

Just Before Obama Election:
09/30/2008 $10,024,724,896,912.49

As of 09/30/2011
$14,790,340,328,557.15

As of 02/16/2012
$15,413,030,984,842.14

http://www.treasurydirect.gov/NP/BPDLogin?application=np

Junkyard_hawg1985 said...

William,

Andy's data is for public debt as opposed to gross federal debt.

Junkyard_hawg1985 said...

William,

Per your request, here is the data since 1945 (note: in 1945, debt as a percent of GDP was 106.2%):

Full D Control: -8.9%
Split Control -26.9%
Full R Control: -1.2%

Note that there was only full R control for 7 years in this entire stretch.

For control of House of Representatives since WW2, it is as follows:

Democrats: -3.2%
Republicans: -33.8%

For both cases for D control, the entire drop in the debt as a percent of GDP can be attributed to 1951 when debt/gdp fell by 13.3% in one year.

Looking back since 1900, if I take out the data from WW1 (1917-18) and WW2 (1941-1945), here are the numbers:

Full D Control: +1.7%
Split Control -1.6%
Full R Control: -15.2%

And for House Control:

Democrats: +22.6%
Republicans: -42.3%

Benjamin said...

Junk-

During the Bush jr. years, in a growing economy, we saw the modern-day GOP (in control of House, Senate, WH and Supreme Court) turn DC into a financial Sodom on the Potomac and run red ink by the tanker-load.

The D-Party is no better.

Any faith in the modern-day GOP is totally misplaced.

NormanB said...

Amount of debt means very little contemporaneously. What matters is the interest payments on that debt and that's the chart I'd like to see.

Further, we look at Japan's debt load and make a big deal out of it. But Japan also carries huge foreign reserves. First, I'd like to see sometime Japan's debt minus their foreign reserves as a percent of their GDP and secondly, the same kind of ratio using net interest payments (interest paid on Japanese debt minus interest received from foreign debt holdings) vs GDP.

Junkyard_hawg1985 said...

Benji,

I thought Congress during the Bush years spent money like - well - drunken Congressmen. In terms of the metric being used by Scott in this post (public debt as a % of GDP), the story was not as bad. Republicans had control of the Presidency, House and Senate for about 8 months in 2001 until Jim Jeffords changed parties and flipped control of the Senate. Republicans took control of the Senate back in 2003, then lost it in the 2006 election. For the period when Republicans controlled all three, debt as a percentage of GDP grew by 0.9%. The debt exploded in 2008 when Congress was controlled by Democrats. It was a bipartisan effort to spend that much money we didn't have.

Dr William J McKibbin said...

Here's some good news for US businesses -- unit labor costs in the US are down almost 80% since 1999 -- more at:

http://wjmc.blogspot.com/2012/02/us-unit-labor-costs-in-dramatic-decline.html

I keep saying this, but now is the time to acquire world-class skills in order to compete for premium wages in the emerging global economy...

Benjamin said...

Junk-

I want to vote for a pro-business, anti-militarist candidate.

Ron Paul comes to mind, but I do not believe in a gold standard.

I may vote fro Scott Grannis to be President.

I have no faith in the D-R parties.

Joe said...

How about we talk about the numbers that really matter for us like stock market advance, unemployment, GDP growth and volatility? - Since 1948, the first post WW2 presidency, in all these areas we fared much better with a democrat president than a republican.
Average GDP growth 4.01% vs. 2.75%
Average unemployment numbers 5.4% vs. 5.9%
S&P500 +11.66% vs. +4.38%
Monthly Jobs added +157,701 vs. +81,259
Volatility: all the most horrific stock market crashed in modern times happened under republican supervision:1929, 1974, 1987, 2008
I'm not sure how it works for you guys, but these numbers matter much more to me than the federal deficit. I have to bring food onmy families table and that goes better if more jobs are created and GDP rises faster. I want to invest for retirement and that goes much better when there are no stock market crashes like the ones regularly happening under Republican control. Unless you are a masochist or belong to the top 1% of income earners (who profit from much increasing income disparity as regularly happening under Republican presidencies!) you have to beg for no more Republican presidents. I certainly know what to vote for.

http://www.davemanuel.com/2010/11/20/the-presidential-smackdown-democrats-vs-republicans-by-the-numbers-in-the-modern-era/

William said...

Thank you for posting Junkyard

Junkyard_hawg1985 said...

Joe,

Because we have a president and not a head of parliment, the comparison is not accurate. The president must deal with a Congress that may be of a different party. Also, you need to take inflation into account.

I have also looked back at stock market returns since 1900 by party in power. I used the annual weighted prices for inflation adjusted returns from Crestmont Research which has the best single stock market chart I have ever seen.

SOURCE

Here are the cumulative average inflation adjusted stock market returns by party in power since 1900:

Republicans Control +7.3%
Split Control: +1.6%
Democrat Control: +4.4%

Joe said...

Well I guess the best combo then is a democrat president and a republican congress. In that way we are both right. However, I would concentrate on post-1945 data as the US functions very differently post WW2 compared to before.
I would want to stress the depression adn crash risk under republican presidents, though. It makes life a lot more difficult every time a republican president begins office as you have to fear for the worst and apply hedge strategies.

William said...
This comment has been removed by the author.
William said...

Joe said...
"I would want to stress the depression and crash risk under republican presidents, though."

I guess that you excluded one of the longest bear markets - the 2001-2003 internet/telecommunications bubble crash - since George Bush II was only in office a couple months and it followed 8 years of Bill Clinton.

John said...

Grover Norquist belongs somewhere on that first chart. Having the tax policies of the Clinton Administration would have kept the debt down.

Medicare Part D? All on the national credit card.

Jeff said...

This is silly. Presidents do not appropriate money, congress does. (That was until Obama got several large slush funds given him.)

And the D/R argument is silly also. Dem spend way too much and moderate Rep spend too much. Even when Rep controlled congress and the white house in 2004-2008, moderates controlled the Rep party.

We need true conservatives to run the government for once. Reagan had 4 pillars:
1) reduce taxes
2) reduce the growth of govt spending
3) reduce regulation
4) strong and stable dollar

Sound pretty good to me.

Squire said...

Deficits by presidents is meaningless because those who promote deficit spending today criticize deficit spending by previous presidents or use it to justify more deficit spending.

What matters is today’s circumstances. See my trend line drawn on Commercial and Industrial Loans (FRED graph) at squireaffirms.blogspot.com. I am not trying to promote a blog. See the bust 1990, then boom, then bust 2000, then boom, then bust 2008, and now we are at the trend line. Let us just grow credit at the trendline and accept high unemployment as normal.

Doing otherwise means to me an attempt to create a more powerful government class at the expense of the private sector middle class. Now the Fed has entered the politics with their part in the mortgage bail out.

Pricing capital so low and quantitative easing are an easy substitute for economic structural reform. But it seems necessary as half the populous is greek/argentine.

Benjamin said...

Jeff-
Except I prefer a dollar that helps US industry and profits, and that is a dollar that helps exports.

Japan has had a very strong yen for 20 years. Nearly doubled against the dollar. Industrial production there is down 20 percent, real wages down 15 percent, the stock market down 75 percent and property down 80 percent.

The strong yen has been an abject and epic failure.

It is only faith, not reason, that promotes sentiments towards a "strong dollar."

Jeff said...

Benjimin, You have this obsession with Japan. Get over it.

Japan is easy. There population growth rate is a NEGATIVE 0.1% annually and descreasing. How in the world can you expect an economy to grow with an aging and decreasing population?

A weak currency ONLY helps exporters. EVERYONE else suffers. Net, net, a declining currency is bad...except if you're a government running HUGE deficits.

- Here's what we need to do:
- Cut taxes in half
- CUT govt spending
- put govt parolls/benefits on par with privite sector,
- promote a strong and stable dollar
- END all fed QE and market purchases of anything
- pass 10 new constitutional amendmends limiting the power of government and put them back in their cage. Including:
1. limit size of govt as a % of economy
2. require balanced budget
3. personal property rights
4. religious freedom
5. parental rights
6. State's rights
7. Citizen ammendment (no more natural born citizen or citizenship for illegals
8. Mandatory voter identificaiton
9. No public emloyee unions/on par with private sector pay
10. Equal protection - congress can pay no law that excepts them or govt workers (i.e. they are not in social security...very wrong)

We need a NEW BILL of RIGHTS NOW to limit government before it is too late (which it probably already is).


-

Unknown said...

The lie buried in these stats is that GDP dropped dramatically due to the collapse of the housing and credit markets. Naturally, the deficit as a percentage of GDP shot up. Not a mystery, nor hardly an indictment of PBO as a prolifigate spender

Junkyard_hawg1985 said...

Unknown,

Looking at the data from the BEA, GDP bottomed in 2Q09. On a nominal basis, GDP today is 8.8% higher than 4Q08 by which Obama's debt as a percentage of gdp is being judged by. The debt to GDP is NOT up because GDP fell. It is because he spent too much.

Unknown said...

@Junkyard_hawg1985
There's an easy answer to that too. When the economy falls through the floor, the Govt increases payments on social safety net programs and in this case also increased stimulus spending. The Govt needs to be the spender of last resort.

My main point is that the characterization that characterization of PBO as a profligate spender is false. Particularly, when compared to the GOP candidates that have budget plans that would increase the deficit more than PBO.
http://crfb.org/sites/default/files/analysis_president_fy2013_budget.pdf