Many moderates, and Republicans, are concerned about the current (and growing) US debt. As America finds itself post- financial crisis, winding down two wars, debts exceeding $14 trillion dollars — let’s ask where this came from?
Our history of US debt begins, in World War 2. Massive US & allied spending paved the way to defeat of Germany & Japan — literally saving the world, for freedom & democracy, from fascist regimes bent on destruction & domination.
War mobilization, massive increases in production, & vast deficit spending, essentially revitalized the US economy. Overnight, the command was given to triple the size of the US navy — to a 600-ship fleet.
US debt increased vastly, but with material dominance positioning the United States to win the war — and win the following peace – the US had assumed superpower status. Economic activity soared, and increased GDP/ revenues began rapidly paying-down debt.
Federal debt as percentage of GDP. Click for full-size image
From 1946 through to the 1970′s, debt repayments continued on a steady (though flattening) downwards trend. However, by the 70′s economic inertia had begun to set in.
Generous spending on L.B.J.’s 1963 – 1969 ‘war on poverty’ and the ‘war in Vietnam’ generated strong economic activity. However, taxes had not been raised to pay for this, and as the 70′s dawned, inflation & unemployment became a drag on the US economy.
Suddenly, crisis hit — with the OPEC oil shocks. From 1973 onward, and especially 1979 following the overthrow of the Shah and Iranian Revolution, oil prices were hiked dramatically. The US economy was battered & facing severe headwinds — causing inflation, unemployment & economic stagnation.
Reagan era
In 1981, Ronald Reagan introduced a new direction in US policy. ’Supply-side economics’ championed the cutting of tax rates (without decrease to corresponding spending), based on the claim that increased economic activity would raise the % of revenue to GDP.
While gross tax revenues did increase slightly, the now-discredited ‘Laffer curve’ did not reflect reality — and deficits as % of GDP, increased sharply (see graph). From paying down, the USA had gone to running up debt — and Reagan’s policies, are exactly where this started.
One major factor justifying Reagan’s deficits, was foreign. With great foresight & acumen, Reagan foresaw the weakness of Soviet authoritarianism. It could not compete. Increased US military & weapons spending, brought the Soviet economy to its knees — and ushered in glasnost with Gorbachev, as the Cold War ended.
However, another of Reagan’s policy appointees turned out less well. Alan Greenspan was appointed head of the Federal Reserve in 1987 and served til 2006, promoting a free-market ideology & largely shunning regulation. For decades he was regarded as the ‘Wizard of Wall St’ — but markets today remember him less fondly.
Republican policies continued following Reagan, under George H.W. Bush (father of G.W.). Tax-cutting & increased spending contributed to a continued deficit & rapidly rising debt — having gone from low 30%’s in 1981, to the mid 60%’s by 1993.
Various analysts, including Reagan-era office-holders, identify Republican policies as primarily responsible for the increase of national debt during the 80′s. Particularly at fault were the “ideological tax cutters” — with some attributing this, to a planned strategy of creating deficits, to attack the affordability of social spending.
Where old-style Republicans (Eisenhower and Nixon) had been true conservatives, they had demonstrated fiscal responsibility by running surpluses & paying down debt (spending less than they raised in taxes).
New-style ‘Republicans’, by contrast, were not fiscally conservative — they were happy to run deficits, spend more than revenues raised, and preached the seductive electoral gospel of tax cuts.
Clinton era
Bill Clinton was elected president in 1992. Democrat, and popular as a Southern governor, he was an effective & natural communicator second only to Ronald Reagan.
As president, Clinton presided over the longest peacetime economic expansion in American history. Despite tax rates considered high in G.W. years, business boomed & employment prospered.
Clinton was able to balance the budget & return to surplus, paying down debt and bringing US debt from near 67% of GDP down to 57%. However, despite his popularity, success & achievements — or perhaps because — he was subject to vindictive and personal attack.
Despite these, the US ended the Clinton era ended with a strong economy, budget in surplus & debt-cutting on an aggressive track.