The Election Menu: Tax / Borrow / Spend / Inflate

May 1, 2012 in Analysis & Editorial, Business, Top News

The Election MenuElection years always bring on a replay of charts showing the Federal debt climbing through the roof, but what do they really demonstrate? The difference in debt management between the USA’s two dominant political parties has been simple: Democratic administrations favor higher taxation, and Republican administrations favor borrowing money from private sources. The common thread is excess spending.

Democrats and Republicans both drive spending up. There’s no good case for branding one or the other as spendthrift. They both enter office with large spending agendas driven by the industries and interest groups they represent through their deal-making. Neither party can make a legitimate claim to any serious commitment to spending restraint.

Republican administrations almost without exception in recent years have come into office with a vested interest in keeping the spending going, but directing it to their own favored industries and financing it through debt. This gives Republican supporters an avenue to make money through interest payments to them by the government.

Democratic administrations have kept the spending going, but favored financing the deficits along the way through taxation instead. They are commonly charged with further taxing future generations by way of loose monetary policy hence inflation, benefiting their current constituencies in cash while taking buying power away from future years.

The History

Federal spending generally has gone up in real terms during virtually every year of every presidential term for which we have data shown. There have been years of surplus (revenue exceeding spending), but as a rule spending has risen in excess of revenue when averaged over time. If you look at year by year data on the size of Federal debt in relation to the economy (measured by U.S. GDP, or gross domestic product), you get a better comparison of how the country has done on reining in or losing control of the size of debt. In brief, this is what’s happened over the last 70 years:

Federal debt as percentage of GDP over time.

Federal debt as percentage of GDP over time.

During World War II, America’s war effort had come to dominate all other sectors of the economy, and the Federal debt had ballooned to just over 120 percent of the size of a year’s economic output. This is a generally accepted measure of size-of-debt, as this number effectively eliminates the inflation factor from skewing year-to-year comparisons.

Between 1946 and 1981, the Federal debt diminished fairly consistently as a percent of GDP, down to just over 30 percent. This came about by paying down the debt, and by keeping the growth rate of deficit spending from surpassing economic growth rate overall. Progress in bringing down the debt ratio was achieved under both Democratic and Republican presidential administrations, even despite a period of simultaneously increased spending for both domestic programs and war efforts.

Since 1981, U.S. Federal debt in relation to the economy has gone through two very large increases, and a brief intermediate period of decrease. Between 1981 and 1993, under Presidents Reagan and Bush I, Federal debt increased from about 30 percent to just under 70 percent. Between 1993 and 1996, this measure leveled off, and then by 2001 ending Clinton term two the debt was reduced to about 58 percent. Between 2001 and 2009, the debt ramped back up to about 82 percent.

The Solution

Federal borrowing comes at a cost, in the form of interest obligations, which over time tend to grow exponentially. Debt repayment and interest obligations are due the creditor, and timely repayment becomes critical in these times just to maintain creditworthy standing in the market to avoid even further interest costs that may result from adverse rating adjustments in the marketplace.

A turnaround opportunity exists, if we can apply lessons from our economic boom periods. This recovery depends much on public investment in high growth technologies and more cost-effective infrastructure, drawing from Federal capital spending lessons ranging from Eisenhower through Clinton. Under both parties, the greatest successes in reducing the relative size of the debt have come from high economic growth, generally the result of well-chosen public investments in areas where private capital would not get the job done.

The alternative is simple: Democrats, will continue to tax and spend. Republicans will continue to borrow and spend. Added interest costs or inflationary costs will be passed on in future budgeting. Data show neither party has any legitimate claim to spending restraint. Without reinvestment in our own economy, the relative debt will continue to rise.

Arthur Burditt served as Research Analyst and Director of Special Studies for the Tax Foundation, Inc., a non-profit, non-partisan fiscal research organization based in Washington, D.C., during the Reagan years. He received his B.A. in Public and International Affairs from George Washington University’s Elliott School in 1975, and a Master in Public Affairs (MPA) from Princeton University’s Woodrow Wilson School in 1977.