Deficits Suddenly Matter

In his column “Don't Cave GOP, This Time Deficits DO Matter” posted at Forbes.com on December 14, 2012, Jerry Bowyer argues that deficits do matter.  This is a sudden departure from his previous position.  Let’s take a look.

On page 60 of his book “The Bush Boom” Bowyer argues to forget the deficit.  In the column referred to above, he admits that he has in the past “downplayed the importance of deficits” thinking that a budget deficit is rendered harmless if GDP growth exceeds the growth of the deficit.  The problem was that (except during the mid to late 1990s) GDP growth did not exceed the growth of the deficit.

Bowyer argues that now the debt has grown “to the point where it really is unsustainable”.  He points out that the national debt as a percentage of GDP is “over 100% and rising” and that “for the past few years the deficit has hovered around nearly 10% of GDP”.  So basically the reason for Bowyer’s sudden change in position is that the debt and deficit have gotten bigger.

A little background: A key statistic in evaluating a nation’s financial position is the Debt/GDP ratio which compares the national debt to the nation’s growth domestic product.  Nations with higher incomes are more capable of handling higher amounts of debt than nations with lower incomes.  For the United States, a debt of $1 trillion is a small amount.  For Cuba, a $1 trillion debt would be unmanageable.  A person with an income of $500,000 could easily afford to pay the mortgage on a $1 million house.  But for a person with an income of $25,000 per year… I mean, forget about it.

The U.S. Debt/GDP ratio has historically been much lower than it currently is.  It reached as high as 30% after WWI.  Then after the Great Depression and WWII the U.S. Debt/GDP ratio peaked at 112%.  It was necessary to accumulate that debt to win the war.  But after WWII the nation was responsible and little by little year by year the ratio decreased back to below 30%.

Then along came the supply-siders telling us that deficits don’t matter.  We can grow our way out of it, they argued.  The only problem is that we didn’t grow our way out of it.  The Debt/GDP ratio nearly doubled during the Reagan/Bush years.  The W Bush years returned to increasing Debt/GDP ratio during what Bowyer refers to as the “Bush Boom”.  Debt kept piling on with a brief respite during the Clinton administration.

Bowyer and people like him who kept saying “Forget the deficit,” and “Deficits don’t matter,” are the principle cause of the dire situation that we’re in today.  Spending beyond our means and borrowing to finance the appearance of prosperity for three decades has resulted in this nation going from the world’s largest creditor to the world’s largest debtor nation and being told to “forget it”.  When the financial crisis hit and the inevitable Great Recession, we were not in a financial position to properly address it.  Instead of drawing on savings, we had to borrow even more to prevent the economy from collapsing.

Now suddenly Bowyer wants to change his position, and he does a song and dance to convince himself (he’s not fooling anyone else) that his original position was justified.  But his original position was wrong.  We didn’t grow out of the debt.  Deficits do and always did matter.  Unnecessary irresponsible spending and debt accumulation accompanied by accumulation of off-balance sheet unfunded obligations for three decades is not and never was a good policy.