Congress has Constitutional authority to spend money and borrow against the credit of the United States Government to fulfill its role of enabling life, liberty and the pursuit of happiness. In recent decades borrowing when the debt bumps up against the debt ceiling has devolved into a game of chicken where the political parties put themselves on a collision course with potential disaster for the nation.
The chicken game is on again. In 2019 Congress suspended the debt ceiling for two years which expired at the end of July. In the last 60 years Congress raised, or otherwise altered, the ceiling 78 times. Ten years ago one of the parties didn’t veer off the collision course soon enough and Standard & Poor’s dropped the AAA rating of the Federal government.
When Republicans gained control of the House for the first time in forty years following the 1994 election Speaker Newt Gingrich and President Clinton got testy in 1995 and had several partial government shutdowns. That was Clinton’s weakest year of growth where GDP only grew at 2.7 percent.
Growth in 1995 looks pretty stellar compared to the 1.7 percent growth rate the US economy annualized the last 20 years. The chicken game has become more intense as both parties try to paint the other as fiscally irresponsible.
This is a good time to consider what fiscal responsibility means. Does it mean government spending is out of control if there is a budget deficit and needs to be slashed? Does a deficit mean taxes need to be raised?
To get a more holistic view of fiscal responsibility consider whether it’s prudent for a business to borrow money. If using the capital raised by borrowing increases the net worth of the company it was obviously prudent. If business growth doesn’t cover the additional debt service of the borrowed money it was a blunder. Whether it was prudent or a blunder depends on actual results for the business.
The Federal Government is charged to “promote the general welfare”. Fiscal responsibility for the government comes down to the end result from the spending, taxing and borrowing. Does the production of goods and services, gross national product or GNP, grow faster than the national debt or does the debt grow faster? If the national debt grows faster the burden of servicing the debt increases and the nation perhaps moves closer to some crisis that threatens the well being of Americans. If the economy as measured by GDP grows faster the burden of the debt diminishes and Americans have more goods and services to enjoy.
From the end of WWII to the end of fiscal year 1981 the National debt dropped from 119 percent of GDP to 31 percent. Fiscal year 1981 started in October 1980 and ran through September 1981; it operated off the last budget signed by President Carter. In the chart below the shading for the party of the President aligns with the fiscal years they approved.
Starting in fiscal year 1982 the national debt has trended higher and hit an all time high of 136 percent of GDP in the second quarter of 2020. In three of the four quarters since then GDP has grown faster. President Trump’s last fiscal year will end in a few days.
Using the measure of whether the economy grows faster or the debt grows faster both parties were fiscally responsible between WWII and 1981. Both parties have been irresponsible since 1981 and the Republicans have been worse.
The last time a Republican President signed off on a budget or spending authority for a fiscal year and during that fiscal year the economy grew faster than the debt was President Nixon’s next to last fiscal year of 1974. Since then Republican Presidents have signed off on 26 straight fiscal years where the debt grew faster. Trump’s last fiscal year ending in a few days could have a faster growing economy, but it will be a while before there’s official data.
Intermixed with the 26 Republican fiscal failures Democrats signed off on 20 fiscal years, half of which had the economy growing faster than the debt: Carter had three, Clinton five and Obama two. The last Republican President to leave his successor an economy with GDP growing faster was President Eisenhower. The last five Democrats left their successor a year with GDP growing faster. The last three Democrats inherited an economy with the debt growing faster. President Obama inherited the worst fiscal year since at least WWII, but managed to turn it around by the end of his term.
Why have Democrats had a better record the last 46 years? Is the spending that Republicans deride as out of control actually public investment that enables growth? Is a social safety net that helps keep people from falling through the cracks during an economic downturn a public investment that preserves the productive capacity of people or is it wasteful spending that encourages dependence on the government? If it’s an investment how can we improve it?
I don’t know the answers to these questions, but looking at the quantity of spending or a particular tax rate rather than the result of the fiscal combination of debt, spending and taxes is the wrong approach.
A good tree cannot bring forth evil fruit; neither can a corrupt tree bring forth good fruit. Wherefore by their fruits you shall know them.” Matthew 7: 18, 20
Looking at the tax policy in the fiscally responsible period and irresponsible one may be instructive. In the responsible period 1946–1980 the top marginal tax rate averaged 81 percent and GDP grew at 3.1 percent. In the irresponsible period 1981–2020 the top rate averaged 39 percent and growth annualized 1.5%. The growth rate and top tax rate were twice as high in the earlier period.
Of course, for a high top tax rate to encourage productive tax avoidance where business owners avoid tax by growing their businesses instead of taking high incomes the first five or ten tax brackets have to allow a large enough income at a low enough average tax that those with great capital and talent have plenty of incentive to be productive and run businesses.
In 1940 and 1941 we actually had an 81 percent top marginal tax rate. Its bracket was $5 million, which today would be about $92 million adjusted for inflation or $405 million adjusted for GDP per-capita. Last year GDP per-capita was about $63,400 which is 81 times the $779 GDP per-capita of 1940.
Nobody paid tax at that 81 percent marginal rate because the tycoons who could have taken that much income grew their businesses rather than take enough income to hit that tax bracket. GDP growth in those two years was 8.8 and 17.7 percent respectively. Growth in these two years was not really affected by the war. Pearl Harbor happened in December 1941. The Federal budget in 1941 was a relatively modest 11 percent of GDP. The buildup for the war started in 1942.
To be fiscally responsible and grow the economy faster than the debt, we need public investment that builds and maintains productive capacity of people, as well as, restoring tax policy that encourages our very elite to both run businesses and grow the economy by building businesses rather than taking extravagant incomes.
If voters keep electing politicians that play chicken rather than fix what hasn’t worked the last 40 years we won’t get there. It’s up to us to understand this and make a change. To help you can like this post, comment on it and share it.