“The sky is falling! The sky is falling!” So exclaims Republican Rep. Paul Ryan, chairman of the House Budget Committee, as he points to the 2010 federal budget deficit of $1.3 trillion and the national debt (the sum of all the annual deficits) of $14.2 trillion, a figure nearly as large as the 2010 GDP of $14.6 trillion. As a result of the Great Recession, federal deficits have ballooned in recent years and necessarily so has the debt. Noting these rises, and believing they imperil the economy, Rep. Ryan and his Republican cohorts propose cutting the twin deficits by slashing social programs, especially Medicare and Medicaid.
Given that Rep. Ryan’s alarm and prescriptions are not self-evidently true, a credible analysis of the issue requires that we ask a number of questions: What ratio of debt to GDP poses a danger to the economy? What’s caused the national debt to rise over the past 30 years? How do we account for the nearly three-fold increase in annual deficits since the recession, from about $500 billion to $1.3 trillion? Are Medicare and Medicaid the pivotal driving forces driving deficits upward? Why does Rep. Ryan’s proposal omit cutting other programs that are far more expensive than the two health programs?
Let’s take these questions in order. The figures above indicate that the national debt is now nearly 100 percent of GDP—a level that tells us next to nothing. Just after World War II, the U.S. national debt reached 120 percent of GDP, but the ensuing period, the “golden era,” brought not stagnation but the most robust growth in U.S. history. This growth generated a rising standard of living for the vast majority of people and tax revenues copious enough to advance social needs and reduce the debt/GDP ratio to 40 percent by the end of the Carter administration.
Moreover, while Rep. Ryan endlessly bangs the drum of lower taxes, the successful policies of the golden era were precisely opposite those the free market dogmatists assert are imperative today. From the mid-’40s to about 1980, abetted by unions and a de facto social contract, average median wages rose about 70 percent, and infrastructure spending flourished. Although marginal income tax rates on high-income earners reached 90 percent, investment advanced faster than under the tax cutting regimes of Reagan and Bush II. In the wake of Bush’s cuts, investment plummeted to levels not seen since the Great Depression.
Next, let’s scrutinize the rising debt to GDP ratio since 1980. Rep. Ryan and company are now posing as deficit reducers, but this flies in the face of debt management under Republican regimes since Reagan.
As noted above, the debt/GDP ratio fell to its postwar low under Carter and started rising again under Reagan. This should be no surprise given the snake oil sold by Reagan in the form of supply side economics (“voodoo economics” according to Bush I), which promised that cutting corporate taxes would generate such a higher rate of investment that revenues would surge despite lower tax rates. This did not happen. Coupled with Reagan’s splurge on military spending, the U.S. national debt rose by $1 trillion from 1983 to 1986. By the end of the Reagan/Bush I era, Republican policies had pushed the debt/GDP ratio back up to 70 percent.
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