Tuesday, April 25, 2006

Who is responsible for the bleak state of the nation's finances?

My answer is that the radical policies pursued by the modern Republican party of Reagan and Bush are responsible. Looking at the above graph, its clear that for most of the twentieth century - i.e. until Reagan - the ratio of debt to gdp had continually decreased, no doubt a result of (relatively) responsible governance. The only exceptions were true national emergencies: World War I, World War II, and the great depression. Moreover, the debts that were run up during these periods were steadily paid off over later periods.

Starting with Reagan, however, we see increasingly irresponsible fiscal policies. Reagan was the first US president to stake the financial future of the United States on some pet theories. These were: (i) that lower taxes will actually result in higher income due to the fact that high taxes remove some of the incentives to work, and (ii) higher US defense spending will force the Soviets to spend more on their defense, bankrupting them.

As we now know, both theories were false. Lower taxes resulted in lower income and more debt; and Soviet military spending was unchanged as a percentage of GDP throughout the 80s (see Atomic Audit: The Costs and Consequences of U.S. Nuclear Weapons Since 1940, ed. Stephen Schwartz, Chapter 4 for documentation). But as a result, the United States was saddled with a huge military-industrial complex and a vastly higher public debt.

This began to change later as more responsible leaders (George H.W. Bush and Clinton) made tough choices and pursued reasonable fiscal policies. But our current president has more than undone their work. If one looks at the change in slope in the graph associated with the current presidency, the changes have been disastrous.

Disastrous not because our current debt level is dangerous per se, but because the United States faces a fiscal crisis associated with the retirement of baby boomers. To fully gauge the impact of our impending problems, see The US Government is Bankrupt and Rational Gloom, by Alex Tabarrok.


At 4:20 PM, Blogger angela said...

"Lower taxes resulted in lower income and more debt; and Soviet military spending was unchanged as a percentage of GDP throughout the 80s"

does this mean that i get to write a revisionist book about how the usa lost the cold war because this reagan spending effectively exacerbates the social security crisis?

At 8:40 AM, Blogger fidel said...

ew graphs.

are graphs generated through math.

whack, man. just whack.

At 9:29 AM, Blogger alex said...

this graph i nicked from wikipedia.

At 2:30 PM, Blogger bza said...

Alex, you have to sort out America fo realz. Us Canadians have been balancing our budgets for years, but its just a house of cards since 90% of our trade is with the US.

If you guys go down, your dragging us with you.


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