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Sept. 9, 2011, 12:01 a.m. EDT
By Howard Gold
NEW YORK (MarketWatch) "â? President Obama will ask for a much bigger payroll tax cut than expected in new legislation he previewed in his speech to a joint session of Congress Thursday night.
The American Jobs Act will include some old and new ideas that the president claims are acceptable to both Republicans and Democrats.
We'll see about that, but one thing was striking: The president asked the special committee of Congress charged with finding over $1 trillion of new spending cuts to come up with still more reductions to cover the ambitious $447 billion in new tax cuts and spending he's requesting.
"Everything in this bill will be paid for,"? he declared.
It was a stark admission of how limited his options are because of the debt crisis that's likely to haunt the U.S. and world economy for years to come.
Read Howard's column on the impact of the debt crisis on global markets on MoneyShow.com.
But unfortunately there's a lot of confusion about our debt problem. So consider this column an effort to correct that by addressing three big myths about the national debt.
Some claim that if you just cut spending, all the U.S.'s debt problems will be solved. But at least in the short run, it's as much a revenue problem as it is a spending problem. (Entitlements are another story, and we'll deal with it in Big Myth #3.)
Since World War II, the revenues the federal government took in from taxes and other sources averaged roughly 18% of gross domestic product, while spending (outlays) averaged about 20%. That's not ideal, of course, but it's manageable. It stayed pretty close to that under President Bush after the four surplus years of fiscal 1998-2001 came to an end.
* Reflects budgets under the Obama administration
Source: Office of Management and the Budget
But the roof fell in during fiscal 2009 (beginning in October 2008). Spending grew dramatically as the Great Recession bit deep. Some of it was automatic (more people became eligible for food stamps and unemployment insurance) and some of the increase was a result of new policies.
Read about how President Obama and Gov. Romney are taking on the Tea Party on The Independent Agenda.
But even more astonishingly, tax revenues dropped to an appalling 14.9% of GDP in fiscal 2009 and 2010, and they're forecast to rise to only 15.5% of GDP in fiscal 2011, which ends next month.
We haven't seen those percentages since 1949 and 1950, and we didn't come close to them in the nine recessions between then and now.
What happened? I asked David Walker, former U.S. comptroller general and founder and chief executive officer of the Comeback America Initiative, who's as knowledgeable on these matters as anyone.
"First, on the revenue side, we had a financial crisis,"? he told me. "The financial crisis resulted in dramatic declines in the stock market, dramatic declines in home values, [and a recession that caused] a lot higher unemployment and a lot higher underemployment. People retired early."?
So, from an average of $2.5 trillion annually from fiscal 2006-2008, revenues plummeted about $350 billion-$400 billion per year in the next three fiscal years. That added around $1 trillion to the debt during that time. And without a big recovery don't expect to see revenues rebound soon, so the deep hole will remain.
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