8 October 2023
Edward Lotterman
The recent threat by Indiana GOP Congresswoman Victoria Spartz to resign her seat if Congress does not establish an independent “debt commission,” and what it implies, is as welcome as cool fall air.
Here is a self-proclaimed Tea Party member recognizing that our non-functional legislative branch simply can’t handle any issue. Moreover, by calling for a commission of experts, Rep. Spartz implicitly acknowledges tax increases are part of what we need. That honest facing of reality is a major step forward.
Yes, that last part is facetious. I am sure Spartz would angrily deny any need for higher taxes. But let’s consider the implications of her proposal.
Having taught college econ since 1981, it is clear to me that any independent panel of experts would at the very least call for returning U.S. tax rates to those prevailing in January 2001 — the fourth year of federal budget surpluses that were projected at the time to reduce the national debt to zero by 2012. Didn’t happen.
Now, given how long we have delayed reversing the disastrous George W. Bush administration tax cuts of 2001 and 2003, it’s unlikely that any move would reduce annual federal budget deficits to zero much less reduce the national debt. Rep. Spartz is correct that we have all fiddled while our Treasury burned. But tax increases at this point, while necessary, are not a sufficient step on the path back to fiscal sanity. We also need to overhaul the big entitlement programs, Social Security, Medicare and Medicaid. But all of this is an enormous political challenge.
Spartz probably would demur. She is a proudly self-identified member of the Tea Party movement. When I hear some other Tea Party members describing a flat fiscal earth, I ask myself, “Is this person stupid or cynical?” But Spartz is neither.
A Ukrainian-born American, she arrived here at age 22 with a bachelor’s degree and MBA from Kviv National Economic University and then got a masters in accountancy in Indianapolis. She has to be pretty sharp and seems very sincere. But she must be “badly informed” about U.S. economic history, to put it politely. So are most Americans.
So a brief review of fiscal history is essential.
We essentially had no federal debt before entering World War I in 1917. We then spent a lot, borrowing some. But Andrew Mellon, the Treasury secretary for 11 years in the three GOP administrations after that war, was a fiscal hawk. The debt fell in absolute terms and relative to the booming 1920s economy.
With the 1929 financial market collapse and the Great Depression, the post-1933 New Deal of Democratic President Franklin Roosevelt increased spending and borrowing, horrifying fiscal conservatives in both parties. After World War II broke out in Europe in 1939, we also increased military spending even though two years would pass before we finally had to fight.
The upshot was that in fiscal year 1940, ending on June 30 of that year, we had $6.5 billion in federal revenues and $9.5 billion in outlays. So we borrowed nearly a third of what we spent. At fiscal-year-end, the gross national debt was $50.7 billion. That was 52% of gross domestic product, the value of all goods and services produced.
We dropped atomic bombs on Japan in the sixth week of the 1946 fiscal year. We ended that fiscal cycle in July 1946, having spent $55 billion. Of that, $39 billion came in taxes and we borrowed the rest. The national debt stood at $223 billion, 123% of GDP.
Democratic President Harry Truman and GOP President Dwight Eisenhower were both fiscal hawks. Key committees in Congress during that time were dominated by the same, so a pattern emerged that would last 35 years. We ran near-balanced budgets most years, except when fighting hot wars in Korea and Vietnam or a cold war with the USSR. The national debt grew slowly while output grew much more rapidly. Thus the debt as a fraction of GDP fell year after year, hitting a low of 32.6% in FY 1981, the last of the Carter administration. Since then, the debt and that ratio have risen in all but four years.
It is commonplace to blame the supposedly-free-spending Lyndon Johnson, who wanted new programs like Medicare and Medicaid, while fighting in Vietnam and going to the moon, for subsequent problems. But the deficits of the 1960s were tiny, 0.8% of GDP. Yes, this was up from the 0.5% of the Eisenhower administration or of the decade of the 1950s. But when the deficit hit 2.5% of GDP in 1968, LBJ asked for a tax increase in an election year. We had a surplus in FY 1969, the last we would see for three decades.
Annual deficits averaged about 2.2% of GDP during the Nixon-Ford-Carter years. Except for the four surplus years ending the Clinton administration, it has risen ever since.
The change in fiscal tides came when Ronald Reagan, a GOP president who wanted to spend more on defense and lower taxes met a Democratic-majority Congress that did not want to cut social spending. The compromise was that both sides would get what they wanted. The sharply larger deficits would be covered by borrowing. The average budget deficit for the Reagan years was 3.9% of GDP, five times what it had been in the Johnson years.
They remained as high during the George H.W. Bush years, prompting him to seek the moderate tax cut that cost him reelection. But it and another bump sought by Bill Clinton, together with lower defense spending after the fall of communism and with revenue from the strongest economy in a long time, reduced that administration’s average to 0.5%.
When George W. Bush was inaugurated in 2001, we were still running those surpluses. Ron Suskind’s history, “The Price of Loyalty,” describes how Bush Treasury Secretary Paul O’Neil and Federal Reserve Chair Alan Greenspan worried about how the lack of any Treasury bonds would hobble financial markets. They need not have worried. Tax cuts passed in 2001 before the 9/11 attacks with another in 2003 when we were well into a war in Southwest Asia that would go on for 20 years, solved that worry. Along the way, the bulk of the baby boomers went on Social Security and Medicare, reducing the degree to which surpluses for these programs could be used to hide deficits in all general spending.
There is much more history. But the tax cuts that were supposed to promote growth gave us the two worst growth decades since the Great Depression. Budget deficits hit 5% of GDP before COVID and are at about 6% now. The gross national debt has passed 120% of output — right where we were at the end of the worst war of the 20th century. Congress is paralyzed.
So Rep. Spartz is right, our diseased economy needs a second opinion — outside help, outside of Congress that is. The diagnosis is clear, the prescription is higher taxes and reformed entitlement spending; the next question, then, would be whether Spartz and her lawmaker colleagues in either party would accept the remedy.
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St. Paul economist and writer Edward Lotterman can be reached at [email protected].