Debt Crisis...or Not

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There’s certainly no shortage of people clamoring about America’s current and growing national debt crisis.

For instance, financial expert Jim Jubak asks, “What are the odds that the Bush tax cuts, set to expire in 2010 will be made permanent or at least extended beyond 2010? Pretty good, I'd say, given the desire of politicians to hold onto their jobs. That would cost about $1.5 trillion in lower revenues through 2016, the Congressional Budget Office estimates. Because making the cuts permanent isn't certain, that figure isn't included in any official estimate of the budget deficit.”


http://articles.moneycentral.msn.com/Investing/JubaksJournal/StateOfTheNationBroke.aspx

Jubak goes on, “This ban on including costs that are probable but not legislatively certain and the prohibition on looking further than five years out -- even though politicians routinely push the costs of their most expensive programs "off budget" by delaying the worst for more than five years -- has led to a veritable industry of alternative budgeting in Washington. Many of these have been created by groups with agendas to push -- higher social spending, lower taxes, more tax cuts, fewer tax cuts for the "rich." But what's most interesting to me about them is that any that look out more than five years see an absolutely predictable budget deficit crisis looming somewhere between 2015 and 2040.”


Mr. Jubak closes by wondering aloud “Or I suppose the government could just run the printing presses. Printing new currency is one thing Washington is good at.”

But noted financial guru Larry Kudlow counters, “Parsing through a dozen or so newspapers and websites this morning, I was stunned not to find a single reference to the very strong economic state of the union... I did manage to find one article, buried deep in the Wall Street Journal, entitled “Class of ’07 Gets Plenty of Job Offers.” It talked about employers planning to hire 17 percent more graduates this year than they did last year. This happens to top the college-hiring peak of the last economic boom in 2000.


“There’s also an interesting op-ed by Deputy Treasury Secretary Bob Kimmet (an old friend with lots of supply-side blood in his veins), who notes the positives of “job churn.” More than 55 million Americans, or four out of every ten workers, left their jobs in 2005. Since there were more than 57 million new hires that same year, this is good news. It also means that new hires exceeded employee separations by an average of 364,000 per month. Per month!



"Eat your heart out Lou Dobbs.“The fact is, jobs continue to boom. So do real incomes, productivity, and profits. Economist Michael Darda points out that real wages over the first five years of the Bush expansion are actually growing more rapidly than over the first five years of the Papa Bush/Bill Clinton boom.”


http://article.nationalreview.com/?q=ZmQ3OWE5NTkzNjA3NWJlYTFkMjI0OTA4ODMzMTEzM2U=

That much is undeniable. By every appreciable measure, the current economy is not just very good, it’s GREAT! With very low inflation (2.4%), near record low unemployment (4.5%), strong GDP growth, rising GDP, a rollicking Dow and rising personal income, this economy is booming.


Kudlow goes on, “Meanwhile, unemployment today is only 4.5 percent. Federal, state, and local tax collections are soaring through the roof. Budget deficits are plunging. Inflation-adjusted GDP is averaging just more than 3 percent. Family wealth stands at a record of slightly more than $54 trillion. Total employment is at a record 146 million.“Stock markets, as you might have noticed, also continue to rise. They have done so, almost without interruption, for four years, on the shoulders of a remarkable surge in business profits — which itself is a function of the high-tech, knowledge-based product explosion.“These corporate profits, along with our record-setting stock markets, have enriched the more than 100 million investors who are participating in this prosperity...

“...While the American free-market model is often derided as “cowboy capitalism,” imitation remains the sincerest form of flattery. And it isn’t just China, India, and Russia who are acquiescing to the worldwide spread of American capitalism. It’s also Eastern Europe and parts of South America. Heck, even the socialists in Old Europe — like France and Germany — are getting into the act by reducing individual and corporate tax rates to promote growth.”


Larry Kudlow closes with almost the opposite conclusion reached by Jim Jubak, “Of course, Bush gets very little credit for this in the mainstream media or in the polls, which is a shame. The truth is, the president has had the economic story basically right for six years. His overall economic record is rather solid.“But the bottom line is the bottom line: As we enter 2007, the economic state of the union is excellent.”

Still what about that looming national debt?

Well according to Brian M. Riedl of the Heritage Foundationn, “When measured properly, the federal govern­ment’s debt burden is actually below the post–World War II average. It is lower than it was at any time during the 1990s. However, unless Social Security and Medicare are reformed, lawmakers risk allowing debt levels to increase until they cause the highest intergenerational tax increase in history.”

http://www.heritage.org/Research/Budget/bg1820.cfm

Riedl goes on, “During World War II, the debt ratio surged from 40 percent to 109 percent, meaning the nation’s debt was actually larger than its GDP. After drop­ping down to 23 percent of GDP by 1974, the debt ratio increased to 49 percent by 1994 before drop­ping to 38 percent in 2004...

“...There is no mystery to why the debt ratio has dropped so much since World War II: Economic growth has dwarfed the amount of new debt. Since 1946, inflation-adjusted debt has grown by 84 percent, but the economy has grown by 429 percent— more than five times as fast. (See Chart 2.) Just as a family with rising income can afford to buy a more expensive home and take on more mortgage debt, the growing American economy has been able to absorb its new debt."


Last week, Brain Terminal’s Evan Coyne Maloney said, “On Friday, it was reported that the December US federal budget showed a surplus of $44.5 billion. This was well above the expected $24 billion.

“The twelve month trailing deficit is now down to $208 billion.

“This is amazing. The US federal deficit is now down to just 1.5% of GDP (through fourth quarter estimates).

“At the end of 2003 the deficit was running at over 3.8% of GDP and was in excess of $420 billion. The forecasts were for “$400 to $500 billion yearly deficits as far as the eye can see.”

“That conventional wisdom has been proved COMPLETELY WRONG. Yet, the belief seems to linger on...

“...The fact is, the accumulated deficit as a percentage of GDP has fallen from 75% in 1994 to about 61% today. The deficit is shrinking not just on a current year basis, but also as a burden to future generations...

“...Speaking of which, Italy, Germany, Japan, and France continue to run deficits in excess of 3% of GDP. That is far higher than the US percentage of 1.5%, or 1% for all government. Italy’s accumulated deficit is 100%, Japan’s is 100%, and the EU as a whole is close to 65%.

“It can easily be argued that there is in fact no current budget crisis in the US.”

Evan Coyne Maloney
http://brain-terminal.com/posts/2007/01/22/evaporated-deficit

Right now America’s national debt stands at around 66% of GDP, but its deficit spending has been cut dramatically over the past few years.

Our current deficit, about 1.5% of GDP should be cut even further, but it’s far from disastrous, and in fact it’s less burdensome than most of the Industrialized West’s.

When the current national debt, as well as our deficit spending is viewed in light of a necessary, though hugely expensive military war against Islamic extremism and the rogue states that have supported and sponsored it, as well as a huge security build-up at home, along with the fiscal drag created by the corporate scandals that broke in 2001, the attacks of 9/11/01 and Katrina, it’s astounding that the national debt ratio (appx 65% of GDP) is as low as it actually is.



(Thanks to GZ for stimulating discussion)