Take a good look where spending leads.

Tsing Tao · Nov 12, 2012

Quote from Ricter:

Too much is when you generate an unnecessary recession.
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Recession is a part of the normal business cycle. If you try too hard to stave it off, it eventually comes back with a vengeance.

Tsing Tao · Nov 12, 2012

Quote from Ricter:

It is when it's been much higher.
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That's like saying your oven is cool because you dropped the temperature from 550 to 525F. Besides, you're talking about a projected number. Let's see reality - which is historically much different than reality.

Ricter · Nov 12, 2012

Quote from Tsing Tao:

Recession is a part of the normal business cycle. If you try too hard to stave it off, it eventually comes back with a vengeance.
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Yes, but we don't need government in the service of Randian purists inducing one in the interest of moving a single variable now now now.

Ricter · Nov 12, 2012

Quote from Tsing Tao:

That's like saying your oven is cool because you dropped the temperature from 550 to 525F.
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No, it's like saying we want the oven cooler, and it's getting cooler.

Tsing Tao · Nov 12, 2012

Quote from Ricter:

This year's budget deficit is expected to be $900 billion, a significant improvement. I believe our debt/GDP ratio is also coming down, no data at hand at the moment (but who needs it, that's just "fact checking").
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Fact checking for you. Let me know when the D/GDP comes down.

edit, found smaller img. sorry about that.

Ricter · Nov 12, 2012

Quote from Tsing Tao:

Fact checking for you. Let me know when the D/GDP comes down.

edit, found smaller img. sorry about that.
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Ahh, good. It's been much higher (also during a crisis), and we not only made it through it, we continued to prosper.

nazzdack · Nov 12, 2012

Would you guys either "get a motel room" or "take it to the sheets" with all of this.

Ricter · Nov 12, 2012

Taxes, spending, borrowing, saving, investment, interest rates, exchange rates, current accounts, inflation, money supply, growth: any of these can be too high, too low, or just right, depending on present conditions and the preferences of the populace. They're all in a complex web of inter-dependencies. To focus all your energies on just one, like this thread, and so much of the Right, and all of the libertarians, is thus not a statement based on understanding and careful improvement of conditions, but instead a statement about the size of the state. Comparatively, the size of our state is not large, but to some it feels too large. I suspect they have other reasons for that feeling. At any rate, feeling belongs more to the realm of... religion.

Tsing Tao · Nov 12, 2012

Quote from Ricter:

Ahh, good. It's been much higher (also during a crisis), and we not only made it through it, we continued to prosper.
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Thank you for taking the bait, Ricter. I knew that previous bump would be too hard for you to resist hitching your argument to. This guy happily saves me time in typing (had this article in my bookmarks waiting for this argument). Bold is my emphasis. Notes in parenthesis are mine.

http://usatoday30.usatoday.com/money/economy/2010-01-13-economic-recovery-depression_N.htm

The last time the nation's debt was this big compared with gross domestic product â 70.4% of GDP (note, this is much worse now, the article was in 2010) â was immediately following World War II.

How did the Greatest Generation pare it down? It didn't.

It grew the economy faster than the debt, pushing down the debt-to-GDP ratio and making debt payments easier to manage. But that generation also did some things that U.S. citizens and politicians don't seem willing to do today. It paid higher taxes, and it had a smaller government â and, at least until the 1980s, it kept annual budget deficits small.

The citizens of the U.S. owe $12.3 trillion in Treasury debt to banks, individuals and foreigners. That's about $40,000 per person living in the U.S., and it's not counting the amount our states owe â or, for that matter, what we owe to our individual creditors.

Although the U.S. is currently handling its debt comfortably and pays remarkably low interest rates on it, (Thanks to the Federal Reserve) there's mounting recognition that sooner or later, we must move the debt-to-GDP ratio in the other direction. And that will involve hard decisions on taxes, spending and sacrifice â something the World War II generation knew much about.

Even during the Great Depression, federal spending was never more than 11% of GDP, according to the Economic Report to the President, an annual government publication by the Council of Economic Advisers. President Franklin Delano Roosevelt "wanted to push spending harder than Congress did, but he didn't have much luck," says Harvard Business School professor and historian Nancy Koehn.

Roosevelt had much more luck persuading Congress to spend on the war. By 1942, spending climbed to $35 billion, or the inflation-adjusted equivalent of $465 billion. Annual spending peaked at $92.7 billion in 1945, or $1.1 trillion in today's dollars. By 1945, the U.S. debt was 121.7% of GDP, vs. an estimated 70% today, according to the Economic Report to the President.

Even though wartime spending was staggering, it could have been much higher. The government had three ways to keep war costs â and the annual budget deficits â down:

â¢Price controls. War is often inflationary, because it drives up demand for raw materials, such as steel. To combat rising prices, both for consumers and the government, the Office of Price Administration froze prices on many items, starting with coffee and sugar in May 1942.

â¢Rationing. To make sure there were enough vital materials, such as rubber and oil, the government started rationing. Everything from tires to cheese to typewriters was rationed. An "A" rationing sticker, the most common type, gave drivers 4 gallons of gas a week. And drivers were urged to keep their speed below 40 mph â as much to save tires as fuel. Posters warned, "If you're driving alone, you're driving with Hitler."

â¢Taxes. The top income tax rate in 1929 was 24%, starting at $100,000 â which is the equivalent of $1.3 million today. The top rate rose sharply in 1932 to 63%, but it was levied on income above an inflation-adjusted $15.8 million. By 1944, however, the top rate soared to 94%, starting at today's equivalent of $2.4 million.

The lowest tax rate also rose sharply, from 4% in 1929 to 23% in 1944.

"In the 1940s, the government broadens taxes and makes it part of most Americans' lives," Koehn says. The number of citizens paying taxes quadrupled, and the government began withholding taxes from paychecks for the first time. The Victory Tax, a 5% tax, was levied on all annual net incomes of $624 or more.

But federal income still didn't cover all wartime costs, and the U.S. also had to lend money to its allies. To fund the war, the government had to borrow. Most of the war debt was borrowed from big institutions, such as banks. But the government also borrowed extensively from U.S. households. Movie stars and other famous personalities pushed war bonds; the government raised $187 billion â about $2.3 trillion in today's dollars â through Savings Bonds. The bonds allowed the government to borrow over a long period at relatively low rates.

In addition, pushing war bonds helped to reduce inflation, says Robert Higgs, senior fellow at the Independent Institute, a think tank. "You had consumers earning a lot of money, but not enough goods and services," Higgs says. That's a recipe for inflation: Too much money chasing too few goods and services. But war bonds diverted much of that money from civilian to military use, Higgs says.

Then and now

How did the government repay the war debt? It didn't, really. Much of it was rolled over when it matured, but new borrowing was limited. "During the early postwar years, the federal government ran either small surpluses or small deficits," says Anthony O'Brien, professor of economics at Lehigh University. The federal debt was $260.1 billion in 1945 and $274.4 billion 10 years later in 1955.

But the economy grew faster than the deficit did. GDP was $221.4 billion in 1945, and $394.6 billion in 1955 â despite high tax rates, which persisted. Because of economic growth, the ratio of debt to GDP fell nearly every year from 1947 to 1981. As the nation's debt became a smaller part of GDP, the debt became much less burdensome, much as a fixed mortgage payment becomes more affordable as your income grows.

What's different between then and now? Plenty.

World War II was a finite event, and it's pretty easy to stop war spending and bring the budget back into balance â or close to it â when the war is over.

"Government spending went down by a dramatic amount," after WWII, says Steven Hess, lead U.S. debt analyst for Moody's. And government was far more limited: In 1945, there was no Department of Education, no Environmental Protection Agency, no National Security Agency, for that matter.

Today, the U.S. is involved in two wars: Both have lasted longer than WWII, but they have been far less expensive â about $1 trillion so far. So there's no one dramatic event that will reduce the debt-to-GDP ratio, Hess says. "It's going to be much more difficult." The problems:

â¢Recession. When the economy falters, so does the government's income â that is to say, the taxes it collects from corporations and individuals. The government collected $2.5 trillion in 2008, and it collected $2.1 trillion in 2009, a $400 billion shortfall.

â¢Spending. Federal spending has jumped from $1.8 trillion in 2008 to an estimated $3.1 trillion in 2009.(LOL! What about 2010 and 11? 12? Unlike World War II spending, however, there's no quick end in sight to current spending. Much of the growth in spending since the end of the war came from entitlement programs, such as Social Security, and military spending. In 1963, for example, Social Security and Medicare were 14.8% of all federal tax receipts, and defense was 50.1%. In 2009, Social Security and Medicare are an estimated 40% of federal tax receipts, and defense is 25.7%.

â¢Taxes. The maximum federal income tax rate in 2009 is 35%, down from 39.6%in 2000.

Lower taxes stimulate the economy, and raising taxes in a recession is a nearly sure-fire way of deepening the recession. Nevertheless, tax cuts add to the deficit if the government doesn't rein in spending. "You can't raise spending and cut taxes," and get a balanced budget, says David Wyss, chief economist for Standard & Poor's. Estimates of how much the tax cuts have added to the deficit range from about $1.8 trillion to $1.35 trillion.

â¢War. Fighting a war is one of the most reliable ways to create a big debt. The British, for example, finished repaying their World War II debt to the U.S. in 2007. Germany will finish repaying its World War I reparations in 2010. Every Allied nation except Finland defaulted on its World War I debt to the U.S.

War typically results in higher taxes. For example, Congress passed a 10% surtax to pay for the Vietnam War. You'd take your tax bill and add 10% to it. The tax produced a surplus in 1969, the last one until 1998.

The wars in Afghanistan and Iraq have cost the U.S. $915 billion through 2009, and the Obama administration has allocated another $130 billion to the wars for 2010. So far, however, there has been no serious talk of raising taxes to offset war costs.

Raise taxes, cut spending, or ...

The final option is to grow the economy fast enough â and grow the deficit slowly enough â that debt becomes a smaller portion of GDP.

"We could have a good couple of years of growth," Harvard's Koehn says. Businesses have cut so hard that any uptick in the economy should force them to hire and invest. "But we're going to need more than that to finance these levels of indebtedness."

Currently, the nation's debt-to-GDP ratio is in line with most other developed countries, says Wyss, and well below Japan's. But it's heading higher.

"Once it gets above 100%," he warns, "it gets hard to grow out of it."

The way to cut the deficit is some combination of tax increases and budget cuts, neither one of which is politically popular.

"Ideally, you're supposed to keep a surplus in good times and deficits in the bad times," Wyss says. "That's the advice Joseph gave to Pharaoh 3,000 years ago. He was the last politician to take that advice."
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Tsing Tao · Nov 12, 2012

Quote from Ricter:

Taxes, spending, borrowing, saving, investment, interest rates, exchange rates, current accounts, inflation, money supply, growth: any of these can be too high, too low, or just right, depending on present conditions and the preferences of the populace. They're all in a complex web of inter-dependencies. To focus all your energies on just one, like this thread, and so much of the Right, and all of the libertarians, is thus not a statement based on understanding and careful improvement of conditions, but instead a statement about the size of the state. Comparatively, the size of our state is not large, but to some it feels too large. I suspect they have other reasons for that feeling. At any rate, feeling belongs more to the realm of... religion.
More...

I can debate any of those topics. You pick. And I can show how your cult is wrong on all of them, and we are going down the wrong path on all of them. Of course, you'll never accept any of the explanations as the facts won't tell the stories you want, but that's life.