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Paul Abrams

Paul Abrams

Posted: July 1, 2010 10:19 AM

The latest buzzword is the debt/GDP ratio. Although not (when analogously used in corporate financial analysis) a bad measure of a company's solvency, whether it means much for a country that issues the world's reserve currency is debatable. But, since the world decided to freak-out over Greece's bloated ratios, the American rightwing has convinced the country that the US is on a debt/GDP ratio road-to-ruin, so needed stimulus (to keep our teachers teaching, our police policing and our firefighters fighting fires), jobs bills, and unemployment benefits have become its victims.

So, as Al Smith used to say, let's look at the record.

At the end of World War II, the US debt/GDP ratio was 117%. That is, if our GDP were $100B that year, our total accumulated debt since the revolution was $117B. Of course, we had just before that fought a World War, and suffered the worst Depression in our nation's history. Having emerged from those debacles as the world's strongest economy, and soon to control the world's reserve currency, there was no reason to believe it would not decline.

It did. Indeed, that ratio declined every Presidential term thereafter -- under Truman, Eisenhower, Kennedy, Johnson, Nixon, and inched up only 0.2% under Ford, essentially even. It also declined under Jimmy Carter to a low of 32.5%.

During this period there were wars, recessions, inflation, stagflation, top tax rates ranging from 90% to 70%, mostly Democratic but occasionally Republican Congresses, major industrial strikes, oil embargoes, a national malaise, clean-air and clean-water acts, the EPA, the Department of Energy, the Department of Education, and even "W-I-N" (whip-inflation-now) buttons, Gerald Ford's lapel-based strategy for combating inflation.

Then, the debt/GDP ratio skyrocketed again.

Now, who followed Carter ... just cannot seem to recall, can you?

Under Ronald Reagan, the debt/GDP ratio ballooned by over 20% to reach levels not seen since Eisenhower. Note that the denominator -- GDP -- grew under Reagan so that must mean ... oh, no, it couldn't ... that the debt grew more rapidly than ever before. Under Reagan. Yes, under the visible hand of "the-government-is-too-big-and-spends-too-much-money ... if-not-us, who-if-not-now,-when" Ronald Wilson Reagan. (Republicans will rush to blame Democrats in Congress for the spending, but two facts render that bogus: i) Democrats had controlled Congress for most of the post-war period when the ratios fell, the only political variable now Reagonomics; and ii) Reagan never even submitted a balanced budget and the Congress appropriated the same in toto as Reagan requested ($7.314T requested; $7.361T appropriated over 8 years).

Then H.W. Bush, continuing the new-time economic religion, set new pool, league and American records, growing the ratio 13% in just one term.

Fortunately, Bill Clinton was able to reverse much of that, with a nearly 10% reduction in the ratio. [Causing Congressional Republicans to become apoplectic, crying to "get the money out of Washington", not reduce debt/GDP ratio further in case there were a rainy day].

Enter G.W. Bush. Not to be outdone by his father -- his recurring psychodrama visited upon the country -- George W. added 27% in two terms to the debt/GDP ratio. You see, G.W. was going to be like the courageous Ronald Reagan, not his wimpy father -- although, to be sure, his "wimpy" father volunteered for World War II, whereas Ronnie and Georgie headed for the hills during their generation's wars.

So, with the magic of George W, we entered the Obama era with an 83% debt/GDP ratio. The highest since Harry Truman who had reduced the ratio to 70%. That's six decades.

Just for good measure, W. left us two wars and the early part of the worst recession since the 1930s.

Take that, America. Take that, Barack Obama. At least Truman began with a strong economy and just months of remaining war.

At least Reagan dug his hole for us 20 years before the baby-boomers were to retire, and signed off on a fix to Social Security that included a payroll tax increase. And, Reagan began the practice of raiding the Social Security trust fund to help pay for deficits.

W., on the other hand, worked his wonders just as the boomers were retiring, and did nothing about Social Security except to fight for privatizing it, that would have devastated nearly the entire elderly population had he pulled it off.

Perhaps, it might help inform today's policy choices to ask whether there were common themes for our post-World War II periods of profligacy, as defined by debt/GDP ratio growth.

Gerrymandering provides Congresses that tend to be more stable than Presidencies that come and go. Moreover, as mentioned above, Congress rarely appropriates more money in toto than a president requests. Hence, perhaps we should focus on the presidents.

Remember the words, "tax-cuts pay for themselves"? Soothing. Downright enchanting if repeated enough.

And recall their kissing cousins, "tax-cuts [for the wealthy, mostly, but I'll give the rest of you low-lives something as well to make this appear as a principle] stimulate economic growth"?

Now, under whose presidencies were those "principles" employed?

Reagan. Reagan's VP (H.W. Bush). And, Reagan wannabe (G.W. Bush). In fact, the Reagan wannabe outdid them all.

A word about poor H.W. Bush. He had called Reaganomics, "voodoo economics"--an amazing turn of phrase for a nearly inarticulate man, so he must have believed it. But, he was stuck with it. Then, recession struck (his son was to outdo him in magnitude, but that is another story), and HW raised taxes on the wealthy, and Bill Clinton did it again--right in the midst of a recession.

And, what happened? Economic growth, budget surpluses, and a 10% reduction in the debt/GDP ratio.

Indeed, the two faces of H.W. Bush -- read-my-lipservice to Ronald Reagan, and then following through on his original beliefs so he did part of the heavy-lifting that Clinton had to do, make the point.

So, if the country is really looking for a recipe to reverse growth in Debt/GDP ratios -- the fear-mongering du jour of the rightwing -- perhaps, just perhaps, bowing at the altar of St. Ronald is not exactly the economic religion we need.