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Irwin Kellner Archives | Email alerts
Jan. 17, 2012, 12:01 a.m. EST
By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y. (MarketWatch) "” Budget deficits and their resulting debt are nothing new in this country, so why make a big deal about it now?
The United States began with a substantial debt "” the cost of the Revolutionary War. At that time, the federal government's debt outstanding was more than 30% of the fledgling nation's gross domestic product.
The debt was paid off by 1840, and was essentially nonexistent until the 1860s, as the Civil War loomed. Once again it breached 30% of GDP, then fell "” but was never completely eliminated "” until World War I, when it rose above 30% once more.
Hoping to mount a surge leading up to the South Carolina GOP primary, Newt Gingrich took aim at Mitt Romney's failure to release tax returns and questioned Rick Santorum's ability to win nationally. (Photo: AP)
Federal debt declined during the 1920s, bottoming out at 16% of GDP in 1929. It increased after the Crash of 1929, rising to a new high of 40% during the depths of the Great Depression.
The government's debt shot up during World War II, as the U.S. borrowed heavily to finance the war effort. At its peak the government's debt was more than 120% of GDP. It fell relative to the size of the economy after the war ended, but bottomed out at only 32% of GDP in 1974 (which, incidentally, was a year in which the country was in a deep recession).
From that point on, federal debt rose continuously. By the end of 1980s, it had almost doubled as a percent of GDP to 60%, eventually reaching 66% by 1996. Then, four budget surpluses in a row allowed the government to pay down some of its debt, bringing its percent of GDP down to 56% by 2001.
But two wars and a jump in civilian spending, along with a big tax cut early in the decade brought debt's percent of GDP to 70% by 2008, while the Great Recession of 2007-09 and its aftermath drove debt to more than 100% last year.
While the government's actual debt is projected to climb over the next five years, its size relative to the economy is expected to level off pretty much where it started 2012 "” about 100%.
As you can see, the U.S. (and most other countries) is no stranger to annual budget deficits and their accumulated debt. That said, you have to wonder why all the fuss is being made today about deficits and debts "” where were these antagonists in years past?
True, when it comes to debts, less is more. In other words "” we should not be relying so much on borrowing as we have been doing. But as you also can see, most of these deficits were run under extenuating circumstances (wars, recessions, market crashes and the like).
With the economy still feeling the effects of the Great Recession, now is not the time for austerity; it will only make things worse. There are more effective ways to reduce deficits, such as faster growth.
In my view, faster growth is a win-win way to cut deficits, since it will boost sales, profits, and, of course, create jobs for the private sector, while generating more tax revenues and reducing the need for social spending by governments on all levels.
But as any business person will attest, you have to spend money to make money. Thus when it comes to reducing budget deficits, we need to tax less and spend more "” not the other way around as the deficit-busters would have you believe.
Irwin Kellner is MarketWatch's chief economist.
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Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for... Expand
Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for more than 40 years and previously served as chief economist for North Fork Bank, Chase, Chemical and Manufacturers Hanover. Widely quoted by the media in the U.S. and abroad, Kellner regularly addresses groups of business people and community leaders and appears regularly on Cablevision's News 12 Long Island. Collapse
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