Suggestion: Click on the graph to enlarge it, then print out a copy. (Print it in color if you can.) Because, unless you have a really really tall display, you'll have to keep scrolling back and forth between the graph and my description of it. Also, mark up your printout to identify events like "WWI" (1916-1918)... "Start of Great Depression" (1929)... "Bottom of Great Depression" (1933)... "World War II" (1940-1945)... and so on. That'll help you'll make sense of the following remarks.
The blue and red lines run from 1916 to 1970. The green and gold run from 1956 to 1995. The gray and dark blue lines run from 1975 to 2009. These last two lines hide a good portion of the green and gold lines, because numbers from the two sources are very similar.
Starting at the left side we have red and blue lines. The red is total U.S. private debt relative to total U.S. public debt (federal, state and local). The red line starts around 13.4, meaning there was $13.40 of private debt for each dollar of public debt in 1916. I'm thinking government debt was very low at that point, making private debt look exceptionally high.
Perhaps more significant than the height of the red line is how quickly it drops. I'm thinking that federal spending grew rapidly during World War I, and the increase in government debt, though it appears slight on the blue line, was enough to bring the red line down to about 3.5 ($3.50 of private debt per dollar of public debt) by 1918.
The Roaring '20s are visible as the red line climbs quickly to a little over $5 (1929). The line then drops as private debt declines during and after the Great Depression -- quickly at first, then slowly, then quickly again during WWII. During the Depression the blue (public debt) line rises only a little, until World War II. Then it ramps upward, crossing the red (private debt) line.
After World War II, public debt (the blue line) gradually falls. The second set of data begins with the gold line in 1956, and though the numbers do not match perfectly, the same downward trend is visible.
After World War II, the increase in private debt (the red line) resumes. The second set of data begins with the green line. The red and green lines are substantially different, meaning the two sets of debt numbers are not exactly equal. However, the red and green lines do run parallel, meaning both sets of numbers show the same trend. The similarity of trend is more significant than the mismatch of the numbers.
The red-green overlap -- in fact almost the whole of that long upward trend -- occurs during the so-called "golden age of post-war capitalism" (from 1947 to 1973) when economic growth was exceptionally good. Private debt (relative to public) increased regularly and consistently. Public debt (relative to private) declined persistently.
Following that "golden age" increase of private-sector debt, we find a long period of relative stability stretching from 1973 to 1993. Then from perhaps 1993 to 2001, a dramatic doubling of private debt relative to public -- from $2.50, back up to $5. This increase occurs during the "golden decade," during which federal deficits were reduced and the federal budget came briefly into balance.
Again: The private-sector debt increase of the "golden age" (1947-1973) was followed by a twenty-year plateau of stability (1973-1993). That plateau was followed by another, sharper increase in private debt relative to public. And that increase appears to be followed by the start of another, higher plateau, but this time the plateau is interrupted by the Paulson crisis and the beginning of a sharp drop in private-sector debt, a drop comparable (so far) to the drop we saw during the Great Depression.
In overview, we have the Roaring '20s followed by a period of "crisis and adjustment" (from 1929 to 1945) during which time private debt declines relative to public. Then there is a period of healthy growth (1945 to 1973) followed by a time of troubles (1973 to the Paulson crisis). By this overview, we appear to be at present in the painful beginnings of a new "crisis and adjustment."
The private/public increase between 1993 and 2001 looks very similar to the red line increase during the Roaring '20s. The sharp drop of 2008-09 looks very similar to the drop of the Great Depression. What's different in the later years is that we see plateaus arise. There are no plateaus in the earlier years.
I think the plateaus are the result of economic policy -- basically successful economic policy which is able to maintain certain conditions for extended periods. Policymakers lacked such finesse in the earlier years, which is why we see no early plateaus.
However, since debt climbed to evidently unsustainable levels, and since we have had the recent financial crisis, and since "nobody" saw the crisis coming, I don't think it's a stretch to say that economic policy, though successful, was bad policy.
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A Note to the Reader:
Comparing a small number to a large one can make it look smaller than it really is. Comparing a big number to a small one can exaggerate its size.
The point of this series of posts is to consider whether public and private debt affect the economy in different ways, and what those ways may be. In order to look into that, it was useful to compare public and private debt.
But as it turns out, public debt is relatively small compared to private debt. Therefore, my graph may make public debt appear smaller than it really is, and private debt larger.
Keep that it mind. Do not look at my graph and compare the size of public and private debt. Look instead at the twists and turns of private debt in the context of growth, depression, crisis, and other economic events. And apply the same context to public debt.
This graph, this brief history of debt shows that noteworthy growth is accompanied by a relative increase in private-sector debt. We see it in the "Roaring '20s" and again in the "golden age of postwar capitalism" and again in the "golden decade."
The trouble is that the accumulation of private-sector debt leads to economic troubles. We see this in the onset of the Great Depression, and again in the sudden ending of the "golden age" in 1973, and again in the Paulson crisis of 2008.
In other words, we need a vigorous use of debt in the private sector, but we must not let the level of debt get too high.
Let's create tax incentives to accelerate the repayment of private-sector debt. We can keep the level of debt low that way.
Let's design a tax system where your tax rate varies with your level of indebtedness. In the first years after you buy a new home, you can reduce your tax by making extra mortgage payments. Or if you don't have a mortgage, your tax rate is lower, which actually helps you save for that new home.
If you're a big corporation buying up competitors, you're accumulating debt, which increases your tax rate. So you take a break from the merger binge for a while to bring your taxes down. And that gives your competition a chance to catch up with you. Better competition helps keep prices down.
Need I go on?
Art
Some months later. Today I am preparing to post my series called "Private Issues," which will appear in early April. In that series I discover that the difference in the business cycle -- gentler in the 20th century, rougher in the 19th -- is due to the presents or absence of a gold standard.
In the last few paragraphs of the post above, I refer to "plateaus" on the graph and attribute them to "basically successful economic policy." I wouldn't say that today. Today I would say we got plateaus because we don't have a gold standard. Not because of any successful policy.
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