Yo, Pedro, don’t stand …

Yo, Pedro, don’t stand behind the esparcidor de abonos cause there are lots of smelly economic statements flying out. The level of Federal Debt is a problem but some folks aren’t saying it straight. True, our Public Debt as a % of GDP is approaching 100% and it wasn’t always that way. Starting in 1946, the end of WWII, when the ratio was 120% the Public Debt Ratio fell steadily downward to below 30% until 1981 when Reagan cut taxes. Through Reagan and Bush I the debt ratio rose back close to 70%. When Clinton raised taxes the ratio started going back down to under 60%. Bush II cut taxes and the Ratio went slowly back past 65% until the final two years under Bush when it started leaping up. That has continued through Obama (Wikipedia; The Economist, July 18, 2011; BEA).

Three major Personal Income tax cuts are touted. The first, Kennedy-Johnson in 1964, occurred at the same time as Johnson broke the budget by fighting two wars, one in Southeast Asia which those of us who served in the 60’s remember all too well, and another called the War on Poverty. Johnson hid his deficits by going to a Unified Federal Budget, that is adding in Social Security that was running nice surpluses because of women entering the work force. Even this wasn’t enough – Johnson needed to put a “temporary income tax” in place in 1968 to hold the line on Public Debt.

Reagan cut personal income taxes in 1981 but he didn’t cut federal spending; he shifted it from social programs to defense. By 1982 he reversed (raised taxes) on a part of the 1981 bill. Over his remaining years he raised taxes an additional 10 times! These included a major increase in Social Security following the recommendations of a committee chaired by Alan Greenspan. Reagan’s corporate tax increase during his second term remains the largest ever. By end of the Bush I term the USA’s Public Debt Ratio had doubled and we had changed from the largest lending nation to the largest debtor nation.

Bush II also chose to fight two wars, both of which we are still involved in, without paying for them through increased taxes. Instead he cut taxes that, in turn, were accommodated by massive increases in the Money Supply by the Fed, chaired by none other than Alan Greenspan. Couple this with little to no financial market regulation and the end result was a massive mess in the financial markets where toxic derivatives, a real estate bubble, and over borrowing of all sorts came close to pushing us into a depression.

The old adage applies: If you’ve dug yourself in a hole it’s time to stop digging. Pie-in-the-Sky tax cuts put us where we are so it’s time to stop shoveling it in the esparcidor.

Advertisements

About newmexicoreflections

Retired Economist
Quote | This entry was posted in Economics, Federal Deficit. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s