You cannot spend your way out of debt

Today I am going to once again take a look at the abysmal performance of the national leadership in the financial affairs of this nation over the past 50-60 years.

Two years after the end of World War II Government receipts ((as a percentage of the Gross Domestic Product (GDP)) exceeded outlays for two fiscal years. A Democrat (Truman) was in the White House until 1953 and we saw outlays rise from just under 12% to just over 20% of the GDP while receipts rose from about 16% to about 18.5%. Clearly we were embarking on the path of deficit financing. 

The driver for this deficit financing was the Korean War (referred to as a “police action” and initiated at the request of the United Nations). Technically the war was from 1950-53.

During the period from 1953 through 1984 outlays generally followed an upward trend while receipts were more or less stagnant. This encompassed the presidencies of Eisenhower, R 1953-61; Kennedy, D 1961-63; Johnson, D 1963-69; Nixon, R 1969-74; Ford, R 1974-77; Carter, D 1977-81; and the first term of Reagan, R 1981-89. During this roughly 30 year period outlays rose from roughly 20% to almost 24% of the GDP while receipts averaged out at approximately 18%. This is a clear picture of a nation encumbering itself with a real debt problem.

There were several actions taken during this period which contributed to the debt growth: The Vietnam War; The Great Society; The Guns and Butter; The bureaucratic growth at all levels of government; etc.

From 1984 through 2000 we saw outlays fall from 24% of the GDP to 18% while receipts remained stagnant at 18%. It appeared as though the nation’s leadership was finally understanding the problem they had created and might actually start paying off the national debt. We even had a nice surplus during the last few years of the Clinton administration.

The last 12 years have witnessed only chaos in fiscal management by our national “leaders.” This has occurred under both Republican and Democratic administrations. Outlays have risen to about 25% of the GDP while receipts have fallen to about 14% of the GDP. The receipts level is the lowest since 1950.

While, in my opinion, one of the major drivers in this latter situation is the ill-advised excursions into Iraq and Afghanistan there have been a number of domestic misadventures by many individual citizens and institutions also. The housing market was driven to unrealistic heights by people borrowing beyond their means to repay their loans, abetted by lending institutions that had been given free rein to do so by the government. Many stocks are traded at prices that are absolutely unreasonable considering that they have no underlying value to support those prices. We have seen proof of this through the Silicon Valley bust and the housing market implosion.

The answer to the financial debacle we are in is not that we should raise or lower taxes (although lowering taxes should be an ultimate objective) since taxes are the receipts side of the equation but that outlays should be reduced. The arguments made by many politicians that the tax rate is the controlling factor and that lowering it will stimulate receipts is specious at best.

VERITAS

Bayne’s column appears every Sunday. He is an author and historian. He lives in Culpeper. Email: walking.h.farm@hughes.net.