Thursday, June 2, 2011

U.S. Debt Ceiling: Perspectives

The U.S. debt ceiling is now in the news. At times like these, passions high, historical perspectives are usually neglected, hence this small effort to look at the issue over some period of history. Herewith then the debt ceiling since 1940.

Before we get there, a simple definition. The debt ceiling is a legislatively set number. Congress designates a number that the U.S. Treasury may not exceed in cumulative borrowing. The current Debt Ceiling is set at $14.66 trillion, and Secretary Geithner may not borrow more than that. Now, by definition, if the Federal Government must borrow in order to make any payment—and it cannot—because it would exceed the debt ceiling—why then the U.S. Government is technically in default.

With that out of the way, let’s look at some charts. The one we’re most likely to see is the raw dollar level over time. And here it is:


Now the interesting feature of this chart is that the debt ceiling on the left of the chart is virtually invisible—whereas on the right it forms an Everest. But what this chart really shows is that the U.S. economy of the 1940s, in comparison with the economy of the 2000s, was puny. Therefore, to get some necessary perspective, let’s look at another chart.


What we see here is the debt ceiling as a percent of Gross Domestic Product. Interesting, isn’t it? Suddenly the highest peak is now on the left, in the 1940s. In point of fact, at the midpoint of that decade, in 1945, the United States was at the highest level it has ever reached, at 134.5 percent of GDP. On the far right of the chart, in 2010, we are evidently striving for another peak, but we’ve a ways to go. In 2010 the debt ceiling stood at 97.5 percent of GDP.

Now in the 1940s the United States was engaged in a global conflict, World War II. The question then arises, who is the big enemy in 2010? Does the War on Terror really amount to a world war? Or is that bar aspiring to the level of the 1940s really a war against an internal enemy, the Lords of the Universe in Red Suspenders? I incline toward the latter explanation.

But let’s look at growth rates in the following graphic.


Here I’ve calculated the compounded annual growth rate of the debt ceiling from 1940 to each respective year shown. Here the growth of the economy makes itself felt. The most stupendous annual growth rates are shown in the 1940s again, with the highest growth rate achieve in the years 1940 to 1943—62.4 percent a year! Since 1994, however, the annual growth rate, again measured from 1940, has never exceeded 9 percent, and for the entire period, 1940 to 2010, it was 8.4 percent a year. Big growth that, to be sure.

To give a more nuanced view, here is a graphic that shows growth by decade:


Once more we see that the debt ceiling grew most in the 1940-1950 period, least in the following decade—a time when the top tax rate was double that which prevails today. Second highest growth took place in the 1980-1990 period. In the most recent decade, 2000-2010, the ceiling grew at 9.2 percent a year as our mindless military activities coincided with our amoral speculative fevers. Imagine what might have happened in the 1940s and 1950s if, back then, the Greatest Generation had behaved like we do.

The conclusions I draw from these graphics are mixed. First, the sky is not falling down just because our debt ceiling now almost touches 100 percent of GDP. It’s been much worse in the past—and we’ve not only survived that but have had immense economic expansion. But when the debt ceiling rose sky high in the past, we were engaged in genuine global conflict. That’s not the case today. Our current indebtedness is way, way too high. But it is due to our lack of will—to tax! We’re spending billions on wars, but our tax rates are not at war-time highs. That’s the real problem. We should stop wars that don’t defend our borders, and we should tax the people in line with what we spend.

I have the debt ceiling data from a compilation prepared by Wikipedia here. I’ve taken GDP figures from the Bureau of Economic Development.

4 comments:

  1. Gosh, it's almost as if the entire debt-ceiling crisis is a cynical ploy by a small group politicians who are holding the credit rating of the United States hostage to get their way.

    I hate to sound so cynical, but cynical politics deserve a cynical comment.

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  2. Strikes me, John, that this is a naked tactic. In deficit reduction discussions where taxes are never even permitted to be mentioned, blackmail is open.

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  3. Wonderful, just wonderful

    Now, the question is, why are none of our politicians able to make this argument with some umph by way of countering the hysteria?

    If you would allow, I'd like to use that second chart of yours in a Market Size post.

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  4. By all means, Monique. I'll send you the spreadsheet.

    ReplyDelete