Sunday, November 21, 2010

It's not what you thought


A couple years back, there was a flurry of excitement over a graph showing that total U.S. debt had reached 350% of GDP. This graph breaks that 350% into its public and private components:

The "public" debt shown here includes debt of federal, state and local governments.

The trend in government debt relative to GDP (the black line) is essentially flat from 1960 until the Paulson Crisis of 2008. And all that time, private debt (the red line) was climbing. So, if the increase in debt relative to GDP is a problem, the fault lies entirely with the private sector.

For notes on sources, refer to this Google Docs spreadsheet.
For the graph shown here, refer to this Excel file.
For data and calculations, refer to either file.


Philosopher Chip said...

Good point in your post today. I'm marking your blog and will read more

Thanks for the encouragement...I'm determoned to at least get this question in the national conversation. When I post this in various newspaper comments sections here in the southeast people think I am literally making the whole thing up. AM has them brainwashed...
Conservatives have no answer to this question!
They can't explain in their economic policy how America did most of the great things we have ever done (and paid for them) between 1940-1980 and the whole time our federal income tax on the most wealthy citizens was DOUBLE TO TRIPLE what it is today while our deficit and debt were nill compared to today. Conservatives have no answer to that question!

stocksystm said...

I'm adding your blog to my favorites since it looks interesting. I'm retiring at the end of the year and will have a lot more time on my hands.

The Arthurian said...

Thanks, guys!

Chip, I admire your vigor. Good luck. As you point out, in those postwar years when the economy was doing really well, taxes on the wealthy were very high by our standards. This shows that such taxes do not ruin a healthy economy.

On the other hand, I don't think it shows that high taxes on the wealthy will restore health to our economy...

Stocksystm -- Wow, it's coming soon, isn't it. I'm a few years away from retirement yet, myself. You'll have to let me know how it goes.

And yeah, blogging will take up a lot of your free time!


EconomicsJunkie said...

I must be missing something here, where did you account for the unfunded medicare and social security liabilities?

I'm just asking because without those any comparison, not speaking of placing blame, between public vs private debt is obviously completely meaningless.

The Arthurian said...

I think those are called "unfunded liabilities" rather than "debt," because they are not debt. They are expected to become debt in the future. What that means, of course, is that those unfunded liabilities do not and can not show up on my graph. My graph does not show the future.

In To Renew America, Newt Gingrich considered the benefits of increasing the economic growth rate by one percent, and wrote: In this world of merely 1 percent higher growth, the Social Security Trust Fund never runs out of money... So if the economy was growing at that slightly faster rate, there would be no "unfunded social security liabilities" at all.

That's my focus, Nima: to improve growth.

Unknown said...

Hey! I thoroughly enjoyed this post. Highly informative and it definitely made me think about some of my views.

Was wondering if you could correct me if I wrong: my understanding is that post-WW2, government spending was cut dramatically and the "high" tax rates on the rich were full of loopholes and deductions so the average percentage paid is actually very close to what is paid today.

The Arthurian said...

Not really my area, SimpleFacts. But sure, as wartime spending came to an end, government spending must have fallen a lot. There is a graph here:

shows big spikes for WWI and WWII. Pretty sure this graph shows total government spending: Federal, state and local.

On taxes, I've heard that since the financial crisis, Federal tax revenues are below average. But otherwise they were consistently close to (I think it was) 18% of GDP.

But like I said, not my area. Actually, since the subject has come up: I never talk about taxes being too low or too high. I only talk about how the economy is affected by WHAT is taxed.