Who Ran Up the Federal Debt?

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         To me, this may be the most amazing thing about the whole economic story of the last 30 years, and it’s certainly the most ironic: Except for about $900 billion of federal that existed before the Reagan presidency, and the interest since accumulated on it (the level of federal debt has not been reduced since the 1950s), the federal debt hanging over America today is entirely Republican debt!  The Republican debt is over $12 trillion and rising.

This graph shows how the national debt grew up to 2008:

Today, the federal debt exceeds $14 trillion.  As the following graph [2] shows, over $12 trillion of that (and growing) is attributable to deficits and borrowing incurred in the Reagan, George Bush, and GW Bush years, and the interest since compounded on that debt.  The Clinton Administration, aided by a growth surge associated with the “dot com” boom, essentially balanced its budgets.  As shown on the graph, the debt increased some in the Clinton years, but only to pay the interest on the Reagan/Bush debt:

As shown here, the total outstanding balance of the Republican debt is more than $12 trillion today.  You can find it here in real time at zfacts.com:  US national debt.

We hear a lot of talk about how “big-spending” Democrats have caused the current debt crisis with expensive social programs.  The radical right complains hypocritically about Medicare and Medicaid, but those health care programs were in place before the Reagan Revolution, and did not incur federal debt.  Social Security is self-funded by payroll taxes, and it’s in surplus.  Because it is “off-budget,” it does not contribute to budget deficits or debt.  Indeed, several trillions of dollars of federal debt have been financed by borrowing from the Social Security surplus!

The budget deficits created by the Reagan/Bush/Bush tax cuts simply mean that the wealthy elite has been avoiding paying its fair share of taxes, not that these programs are too “liberal” or expensive. [3]

Claims about Democratic administrations contributing to the debt problem in the last 30 years are simply untrue.  Consider this next graph, which shows the national debt as a percentage of GDP.  (Comparing the national debt to the size of the entire economy helps keep its relative size in mind, like adjusting your income for inflation to determine if your real income is getting bigger or smaller over time.)

The graph shows that the accumulated debt of WW II was huge compared to the economy, and that it was being steadily reduced in both Republican and Democratic administrations, until 1980 and the Reagan Administration.  Since then, over the last 30 years, debt has gone up dramatically as a percent of GDP during the Reagan/Bush/Bush administrations.

In the Clinton Administration, debt was substantially reduced as a percent of GDP.  As shown in the previous graph, the debt incurred in the Clinton Administration was only raised to cover the cost of interest on the previous Reagan/Bush new debt, which had nearly doubled debt as a percentage of GDP from roughly 35% to about 68%.

Then, in the fiscally disastrous GW Bush Administration, the federal debt increased to about 90% of GDP.  As of March 25, 2011, the total U.S. Public Debt Outstanding was $14.26 trillion, 97.3% of calendar year 2010’s annual GDP of $14.66 trillion. [4]

Obama is politically, and falsely, slammed by the right as a “big spender” because of the need for spending to save the economy from the Great Recession that emerged from the Crash of 2008, which could have become a whole lot worse.  President Obama made it clear from the beginning, however, that he intended to balance the budget as soon as possible.  Ominously, the federal debt is back to nearly 100% of GDP, a perilous situation that was last seen at the end of WW II.  Balancing the budget is becoming impossible.

Over the last 30 years, the borrowing power of the federal government was used to finance the tax cuts for the rich.  

We cannot know whether there would have been any budget surpluses over the last 30 years if the marginal tax on personal income had stayed at 70%.  But we do know that there has been an estimated $10-11 trillion of wealth transferred to the top 1% as a result of the marginal tax being reduced, so the $12 trillion of Republican debt, it is fair to say, was nearly all (if not entirely) raised to finance the tax cuts for the wealthy.

This is important and bears repeating: Our huge national debt is the result of  continuous deficits needed to finance lower taxes for the wealthy elite.  If the marginal rate had stayed at 70%, which as we have demonstrated was a proper for growth, prosperity, and stable income and wealth inequality, there would be no debt problem today.

To those who complain about government “welfare” programs, it must be pointed out that this has not only been the biggest spending “program” of all, it is now bankrupting the country. The cost of reducing the tax responsibility of the wealthy elite over 30 years has been astronomical, and beyond fiscally irresponsible.  In essence, the wealthy elite used the credit of our government to borrow more wealth for themselves, and it is becoming abundantly clear that’s a loan they do not intend to repay.

I am compelled to point out that the last time the federal debt was 100% of GDP, right after WWII, America survived and prospered by taxing the highest incomes at a higher top tax rate:

The top tax rate stayed at 90% until the mid-1960s, when it could be safely lowered to 70%.  Lowering the tax rate below 70% in 1980, so the wealthy could get richer, was the prescription for the disaster that we now have.

In December 2010, The National Commission on Fiscal Responsibility and Reform issued a report entitled, ironically, “The Moment of Truth.”  With complete detachment from reality, it recommended reducing the top rate from 35% to 23-29%.  According to the Commission, “The top rate must not exceed 29.”  Its plan, in effect, is a tax reduction plan, in which “revenue reaches 21 percent of GDP by 2022 and is then capped at that level.”

Under that plan, by 2022 the American economy would be long since in a depression.  To get out of this bind, America needs a top rate closer to 70% again, and soon.  But official America, its debt commissions and its politics and media, are controlled by the wealthy elite.

Wake up America:  You’re still headed in the wrong direction!

JMH – 4/13/11


[1]  As I write this, I’m looking at my copy of what I call “Laffer’s Laugher,” a book called “The End of Prosperity: How Higher Taxes Will Doom the Economy – If We Let It Happen.”  This ideological propaganda was ironically published just before the Crash of 2008, when the housing market collapsed costing thousands of Americans of their homes and, for all but the wealthy few, many trillions of dollars of wealth.

[2] From zFacts.com.  This site provides the spreadsheet computations.

[3] Indeed, the right wants to scare America into letting them privatize these programs, for their gain, at the expense of the American people, by misleading people into thinking their taxes are unduly burdened by these programs.  On the contrary, over the last 30 years our tax dollars have been hard at work helping the rich get righer.

[4]  Wikipedia, “United States public debt” (3/2/11); United States Department of the Treasury, Bureau of the Public Debt (December 2010). “The debt to the penny and who holds it”. TreasuryDirect.

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35 Responses to Who Ran Up the Federal Debt?

  1. Sheldon Murphy says:

    Hello fellow Summersongster,
    I’m interested in your efforts and obvious passion and commitment to the cause of fair representation in all its guises. I have just read a fair number of your subject items on the right side of the site and feel that your eyes have some more opening ahead them.
    I cant claim any kind of deep scholarly knowledge re: the issues that have gotten us to such an unbalanced economy but I kept waiting for you to mention trends that started way before the Reagan era that are far more incideous and dangerous. May I suggest you familiarize yourself with the work of G Edward Griffen who is concidered to be one of the great scholars of our time, especially his work ‘The Creature From Jekyll Island’ about the creation of the Federal Reserve and our whole corrupt banking system. Efforts to impoverish and disempower the common citizen of our country have been going on for a long time, since before the turn of the last century. He has a great news site called ‘Unfiltered News’ online which some people find too sensational but is just an example of the horrendous trends afoot that aren’t available in our corrupt media. There are, as you know, lots of alternative news sites and I’m sure you have your favorites, so I encourage you to dig deep. Its a strange world out there and we need to raise a BIG STINK. So thank you for your efforts. ALL POWER TO THE PEOPLE!!!! thank you,
    Sheldon Murphy

  2. tbo2010 says:

    I am not so sanguine about “all power to the people.” Are these the people who have risen to Donald Trump’s bait and put him in “serious” consideration for the Presidency? Are these the people who, faced with mortgages they knew they couldn’t manage, signed up for them anyway? Are these the people who believe in angels? I don’t think we, the people, are able to grasp essential economic concepts very well, and in consequence, we can be sold a variety of snake oils. “All power to the people” sounds like a cousin to “let the market decide.” I would rather we elected competent, fair and honest public officials and let them make regulatory and fiscal and monetary policies, with an eye to the future, which would require them to enforce some sacrifices in the short term. Anybody know where to find such officials?

    • No, alas, the electorate does not understand economics nearly well enough. Getting a competent government elected has always been a chore, and it’s crucial now. Obama is one of the most competent presidents we’ve ever had, and he understands economics very well. (Check out his Cooper Union speech.) Democracy is messy, but as a lot of folks have been saying recently, “What’s the alternative?”

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  15. Jay says:

    Between 1932 and 1945 the national debt rose at a CAGR of 22%.
    Between 2000 and 2008 the national debt rose at a CAGR of 7%.

    But when you don’t know how to properly make a graph (using a linear scale instead of a logarithmic scale) you will not realize this. Of course if you don’t even know what a logarithm is you are lost.

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  24. gatorjimbo says:

    I think you lose credibility when you start arguing that one side is right while the other is wrong. The blame of a single party is what, IMHO, discredits anything you posted on this particular blog. To sit here and say that President Obama is “is one of the most competent presidents we’ve ever had, and he understands economics very well” tells me that you have some pretty strong Kool-Aid in your cup. Facts are facts and right now, they are pointing out that he is spending way more then any previous administration and it’s NOT getting us out of our current recession. Bush, Jr, started this trend of stimulus and bailouts and the current Administration is continuing the mistake.

    • Thanks, you have a valid point about being too enthusiastic about Obama. I’ve been critical of his leadership. However, I’ll stick with my endorsement of Obama’s theoretical economics. Both sides don’t always have a valid point: I have seen nothing to suggest that “trickle-down” can be both right and wrong. It’s wrong, and middle-class support for trickle-down has been the downfall of the bottom 99%.
      We have to go with factual analysis. Of course, Obama needed to spend money when we were diving toward a depression in 2009. The effect of that on the debt and deficits, though, has as much to do with the revenue side of the budget issue. He got no support from the wealthiest Americans in trying to save the economy, and their representatives in Congress have been determined to reduce government and the economy of the bottom 99% even more. They prevented the expiration of the Bush tax cuts for the top 1% in 2010, and have generally thwarted recovery and deficit-reducing stimulus all along.
      People who believe in trickle-down will always tell me I lack credibility, but I have been forced to reject trickle-down as invalid. Show me I’m wrong on that, and you’ll have me! But then, of course, I’ll need your explanation of why inequality keeps rising, and why we’re crashing towards a depression. – JMH

      • gatorjimbo says:

        Actually, I believe in the Fair Tax act, not in Trickle Down or Keynesian economics or any other. I don’t believe that taxing the rich more to supplement the poor is successful. It never has been except in the eyes of Hollywood Heroes. Taxes, economic theory, all of it goes hand in hand and right now, in my opinion, Obama will continue to fail as long as he believes taxing the upper levels more will solve our problems (along with spending more money).

  25. Biffdavenport says:

    This article is the biggest pile of horse shit lies I have read in a long time. A great piece if you believe in big government control and weak economic growth. The “facts” in this piece really are from a certain perspective. My favorite part is how it all comes back to the republicans fault. It is a progressive idea. it has nothing to do with dem vs republican. Big government progressive statists, are the ones. Communists talk about how the rich get richer. a tax rate of these proportions will kill growth and incentives to work. Then, we call all sit back and live off the government teet.

    • Thanks, Mr. Davenport, for checking in. I agree, it’s not really about Republicans vs. Democrats; and communism is not involved in this issue at all. I prefer to look at it as 1% vs. 99%, as the political system has pretty much outlived its usefulness when the vast majority are not represented and are continually victimized. In this post we report, factually, on when the national debt was incurred, and relate that to the when the reductions in federal taxes on wealthy people’s incomes took place. It’s happens to be a fact that all new debt (i.e., excluding borrowing to pay interest on outstanding debt) since 1980 took place during Republican administrations. There is a useful reason for recognizing that this is Republican debt: It reveals that the GOP banter about “big-spending” Democrats getting us in this fiscal mess is exactly what you say the information itself is – a huge pile of lies.

  26. Ryan L. says:

    There is no doubt that we need to raise tax rates in this country and soon. Currently, tax revenues equal only 15.4% of the GDP which is way below the average which is 18%. The very, very scary thing is that the GOP claims that taxes are STILL too high and are dampening economic growth and prosperity. The thing they fail to realize is that Ronald Reagan’s two terms saw tax revenues average 18.2% of the GDP overall and 18.4% in his last year which means Reagan only effectively cut taxes by 1.2% during his 8 years in office. That’s a far cry from what W did cutting tax revenue from 19.5% in his first year to handing off an economy to Obama which saw tax revenues making up 14.4% of the GDP in it’s first year.

    A top tax rate of 70% will never, ever happen again. The GOP has managed to convince their base into thinking that taxes are the devil even though GOP tax policy only really benefits a very small portion of their voting block. The GOP’s march to the far right has caused the opposite effect on Democrats. Instead of a march to the left you are seeing most Democrats occupy the spot just left of center or middle left, with very few at least openly embracing far left policies. So, because of the position Democrats have taken up they still have to embrace the free market, although their version of the free-market is more controlled chaos versus the all-out chaos on the right.

    As a Liberal myself I think that a 70% top rate is too excessive and actually unneeded since most of top earners don’t technically have an “income.” Instead, I would opt for a 40% top level income tax rate and raise revenue the following ways:
    1. Raise estate taxes to a middle-ground between Obama’s proposals and Clinton levels. The Obama plan would exempt the first $3.5 million from any taxable estate. Any estate above $3.5 million would be taxed at a 45 percent rate. Under Clinton, the estate tax exempted $1 million from any taxable estate. This level would not grow with inflation over time, subjecting more estates to the tax. The rate would start at 18 percent and climb to 55 percent, as it did in the 1990s. The 55 percent rate would begin at $3 million. So, something like the first $2 million is exempt and anything after is taxed at 50 percent.
    2. Raise capital gains and dividends taxes: For Capital gains I would tax everything above $75,000 at 30 percent and tax dividends as regular income.
    3. Raise the ceiling on the payroll tax to 90% of earnings which is $200,000
    4. Impose Financial Crisis Responsibility Fee on large firms responsible for the financial crisis to payback tax-payer bail-outs
    5. No longer allow the use of LIFO accounting methods which allow companies to artificially make their expenses look high, inventory look low, and pay lower taxes on the understated profit.
    6. Eliminate tax breaks for fossil fuel and environmentally toxic industries.
    7. Impose small sin-tax on carbonated soft-drinks. 3 cents per 12 ounce soda, meaning a 12 pack of coke would cost an additional 36 cents. All revenue would go toward health care costs.
    8. Once unemployment is below 5% we reinstate by the payroll tax by gradually raising it by 1% every year until back to original rate. After which raise rates by additional 1% by gradually increasing by 0.25% a year.
    9. Require federal workers to pay into social security.
    10. Surtax on millionaires: 2.5% For income between $1 and $10 million, anything over $10 million is taxed at 5%.
    11. Increase gas tax by 10 cents. More money to build and repair highways will lead to lower gas emissions through more efficient travel on better built roads.
    12. Enact carbon tax.
    13. Eliminate tax loopholes
    14. Reduce farm subsidies, eliminate oil subsides
    15. Index tax code to chained measure of inflation standard measure to adjust various portions of the tax code for inflation. CBO estimates that the chained measure is likely to grow 0.3 percentage points more slowly than the standard measure over the next decade, so applying the chained measure would increase the amount of income subject to taxation and result in higher tax revenues over time.
    16. Improve overall tax collection by reducing tax gap.
    17. Tax life insurance benefits based on size of life insurance benefits and personal income tax rate of recipient
    18. Limit Mortgage Interest and Other Itemized Deductions for High Earners-cap on the amount upper-income taxpayers (individuals making over $200,000 and families making over $250,000) could receive from these tax deductions. The option limits, to 28 percent, the rate at which itemized deductions reduce an individual’s tax liability.
    19. Limit state and local tax deductions all around
    20. Eliminate Bush Tax Cuts for all earners above $100,000

    At the same time, I would increase the Extend $400/person Making Work Pay Credit, expand the EITC and Child Tax Credit and make permanent, Extend “American Opportunity” College Tax Credit by making it permanent and increasing credit from $4,000 to $5,000.

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