History, the Antidote to Krugman Lunacy
John Steele Gordon's column in today's Wall Street Journal entitled "A Short Primer on the National Debt" is a must read. It's chock-full of important information, including a layman's glossary of terms used in the conversation about debt, a short history of America's national debt, and why the most important facet in the discussion about debt is its size relative to gross domestic product.
However, considering that Paul Krugman is still allowed to make absurd claims like this (in a nutshell, that the Bush tax cuts depleted revenue and added 20% to the debt to GDP ratio) without being laughed out of existence, I thought the following point from Gordon's article was a most valuable bit of information to have on hand next time you find yourself confronted with leftist lunacy of the Krugman variety.
The debt was 58.15% of GDP in 1990, a full 24 percentage points above its 1980 low. It continued to increase dramatically in the early 1990s, reaching 68.91% of GDP in 1994.
But then a Republican Congress was swept into power that year, the first time the GOP controlled both houses of Congress since 1954, and President Clinton tacked sharply to the center. In the next six years, while revenues increased 61%, federal outlays increased only 22%. The years 1998-2000 actually showed the first surpluses in the federal budget in 30 years. And the debt, relative to GDP, declined between 1994 and 2000 to 57.3% from 68.91%.
That decline ended in 2001 following the collapse of the dot-com bubble and rising unemployment in the resulting recession. By 2003 the debt-to-GDP ratio had risen to 61.7%. Many blame the Bush tax cuts for adversely impacting federal revenues, causing the debt to spiral upwards. But that is just not true. Federal revenues declined by almost 12% in the early years of the decade, but when the tax cuts fully kicked in in 2003, the economy began to grow strongly again and federal revenues increased 44% in the next four years, while unemployment fell to 4.2% from 6.2%. Federal outlays in those four years increased by only 26.4%, and while the debt-to-GDP ratio increased to 64.8% by 2007, that was still well below what it had been in 1994.
Only with the severe recession that officially began in mid-2007 did the debt-to-GDP ratio begin to soar once more. It reached 67.7% by Oct. 1, 2008, near the end of the Bush administration. A year later, under President Obama, it was at 84.4%, a year later still 93.8%. It is headed quickly towards 100% and beyond without fundamental change in how Washington handles the public fisc.
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Comments:
Sep '10
Re: History, the Antidote to Krugman Lunacy
During the dot com bubble federal revenue increased and during the housing bubble federal revenue increased. In both instances there was a decrease in debt/GDP ratio and you are certain that the cause of the decrease was GOP action first by the House and then by Bush. If I were a Republican who did not want to deal with reality I might say the same thing. Not being one I’ll have to go with the more obvious answer. It was the bubbles that account for most of the decrease if not all of it.
Apr '11
Re: History, the Antidote to Krugman Lunacy
Wow. I went and read Mr. Gordon's column that you linked, and then a few of the comments. The rhetoric amazes me. One commenter said that tax cuts equate to stealing from the future! It's not only Not Your Money, it belongs to the Future!
I would have liked to see more support in the article for his assertion that "Even in a best-case scenario, the absolute size of the debt will not get smaller." Isn't that the goal? Growing GDP is essential, but reducing the absolute size of the debt is needed too; otherwise we are only borrowing time.
Dec '10
Re: History, the Antidote to Krugman Lunacy
It's not really related but I posted this on the member feed:
Believe it or not, less educated legislators do a better job
http://www.theglobeandmail.com/news/opinions/opinion/believe-it-or-not-less-educated-legislators-do-a-better-job/article2143984/
Re: History, the Antidote to Krugman Lunacy
The dot com bubble is taken into account here for the surplus of the '90s. The real estate market, while certainly a bubble that was inflated in part by tax cuts on capital gains, was not the primary driver behind lowering the debt to gdp ratio under Bush's tenure.
What did it was the growth in the economy as reflected by the stock market. After years of market weakness following the burst of the dot-com bubble, stocks climbed approximately 20 percent in the 2 years following the day Bush signed cuts on the capital gains, dividend, and income tax rates.
Re: History, the Antidote to Krugman Lunacy
Additionally, I'm really baffled by those who claim that the tax cuts resulted in a loss of revenue. Writing in The End of Prosperity, Stephen Moore and Art Laffer explain that:
Apr '11
Re: History, the Antidote to Krugman Lunacy
Unfortunately, GDP takes into account gov't outlays. If we factor out this number, we see that the private portion of domestic product has actually shrunk the past few years. The federal gov't starting with FDR then accelerating under LBJ and finally jumping to warp speed under Obama has done more than create a massive bureaucracy, it has literally laid to waste the private sector's abillity to grow and generate massive economic output on its own. Corporate America itslef has moved and planned its infrastructure expansion away from these shores and returning on a dime will not happen. To expect gov't spending to "stay level" while expecting the private sector to pick up the slack and then some is unrealistic for too many reasons to cover in 200 words.
Unfortunately, there will be a lot of pain required before the private sector is humming along again and growing at 1990's levels. Too many things have to be "undone" beyond important policy prescriptions. None of us should expect any miracles.
Apr '11
Re: History, the Antidote to Krugman Lunacy
Diane Ellis, Ed.: Additionally, I'm really baffled by those who claim that the tax cuts resulted in a loss of revenue. Writing in The End of Prosperity, Stephen Moore and Art Laffer explain that:
Aug 29 at 1:28pm
Liberals love to claim "what would have been". In their minds, tax cuts hurt because that revenue would have increased anyway. You know, sort of like how Obama "saved" so many jobs.
Apr '11
Re: History, the Antidote to Krugman Lunacy
I too am baffled by the "tax cuts hurt" argument. A good (though more liberal) friend of mine made that argument once. His reasoning was like this: tax cuts allow an employer to keep more of its money; employees know this, and demand higher wages; prices rise to compensate; inflation results; workers have to be laid off to compensate.
When confronted with the history of tax cuts bringing in higher tax revenue, he responded: that situation is only temporary, eventually wages rise to eat up the surplus and the economy goes lower than it was before.
Now in his defense, he admits that taxes can be too high as well, and what we need to find is the balance, but he believes that the balance is definitely higher than the tax rate now.
Apr '11
Re: History, the Antidote to Krugman Lunacy
Aquozha: I too am baffled by the "tax cuts hurt" argument. A good (though more liberal) friend of mine made that argument once. His reasoning was like this: tax cuts allow an employer to keep more of its money; employees know this, and demand higher wages; prices rise to compensate; inflation results; workers have to be laid off to compensate.
When confronted with the history of tax cuts bringing in higher tax revenue, he responded: that situation is only temporary, eventually wages rise to eat up the surplus and the economy goes lower than it was before.
You can make the exact arguments in reverse and they make as much, if not more... Tax hikes result in higher prices and layoffs as companies are forced to squeeze out profit from a smaller pie after the government takes its graft. Ultimately, it's not that simple though, and I hope we wake up soon and realize that the answer lies in simplifying the tax code (Fair Tax, etc.). We need to stop tinkering.
Nov '10
Re: History, the Antidote to Krugman Lunacy
Taxed less, and employer may keep more of his money; but he may also invest more. Whatever he tends to do is liable to expand.
The idea that employers are more selfish than average, and are ready to take and consume as much money as they can--capitalist pigs are fat from gluttony, remember--is a prejudice. The truth is this: employers are often entrepreneurs driven by ambition, not money-greed, risk-takers who are prepared to forego certain present consumption for future rewards that are never guaranteed. As such, there is no reason to believe they will keep proportionately more of their own money until they retire, even if they can keep more absolutely.
Perhaps employees nonetheless believe they are entitled to share of the money their employees have when the government gets less. But is employee greed, fanned by accurate knowledge of actual wealth differentials, really the main determinant of the wage they will accept?
Nov '10
Re: History, the Antidote to Krugman Lunacy
The article presumes that it is only the debt-to-GDP ratio that matters, not the debt.
However, absolute debt size matters too, and for a very simple reason: if, for some reason, your GDP shrinks, you are in trouble.
Is there some magic law sayng that GDP will remain high? I didn't think so.
Hence, maintaining a large debt indefinitely is a reckless strategy: anything liable to go wrong with GDP will eventually go wrong, and a financial crisis will beckon.
Which is where the US is now.