Sunday, April 19, 2020

The Usual Deficit Blather from the New York Times

The Times today ran a truly execrable article warning us that, once the virus has passed, we will suffer dire consequences from the runup of government debt.  As most readers know, this argument is theoretically illiterate, derived from the false comparison between household and government debt.  We've been through this many times before, and I have nothing to add.

I do want to focus on one sentence, however, to illustrate how intellectual blinders can lead to absurd conclusions.

To quote the author, Carl Hulse, "In other words, the bill will come due, as it always does."

Does it?  Check out total Federal debt measured as a percent of GDP:

As you can see, it skyrocketed during the 1940s, when the US went to war against Germany, Italy and Japan.  By the time the war was over it was at an all-time high.  Yes, we had to borrow to produce all the war materiel and send millions of troops around the world; no one doubts that.  But after V-E and V-J, how were public finances affected?

For the answer, take a look at the federal budget surplus or deficit as a percent of GDP:

Well, we ran a surplus for a few years after the war, hardly of the same caliber as the wartime deficits, and then it was business as usual: mostly modest deficits with the occasional surplus or breakeven year.  So when did we "pay off" all those war bonds?  Never.  We just rolled them over and regularly added more debt along the way.  Nominal growth took care of it.

So no, the bill will not come due, as it didn't before.


ken melvin said...

The greatest coming home to roost is that of all those republican tax cuts and unfunded wars. Those were the times when The Times should have been shouting from the rooftops about deficits and debt. said...

An oldy but goody is that there has been exactly one point in time when the US federal government "paid the bill" and reduced the national debt to zero (it was positive from the beginning as Hamilton hadd the federal government take over state debts left over from the Revolution and the Articles of Confederation period as part of the deal that let him set up fht First National Bank).

That moment was in 1837, basically an initiative of Andrew Jackson that also went along with his refusing to set up a third National Bank after the Second one ceased ro exist in 1835. What happened after we made this great achievement? The Panic of 1837, which was followed by a three year depression. Even though the federal government was very small then, the usual story of tax revenues falling when the economy declines happened while spending did not. So the government ran a deficit, and had to borrow to cover it, which meant that once again we had a national debt very shortly after we managed to get rid of it. We have not gotten it back to zero since that glorious moment.

Kaleberg said...

Does anyone still take the federal deficit seriously. Reagan showed us it was a nothing-burger back in 1981.

john c. halasz said...

Not to mention to cover the huge deficits arising from the current pandemic/crisis,(partly by taking on private debts), the U,S, could issue perpetual bonds. The accounting would be different since they need never be repaid, except at the discretion of the

sam baker gold bug said...

well i'm buying gold. good luck to you condescending know it alls. we were lucky the 50s was period of historically high productivity in newly industrializing globalizing world. all of that is gone now! we are headed for a period of lower structural productivity and no way to just grow out of this ridiculous Fed spending extravaganza. deficits don't matter until they do.