Federal Debt is Masking Major Problems with Our Economy

I noticed something that seems pretty disturbing.  If you look at how much our government is adding to the debt every year and compare it to how much the economy has grown every year, you see that the economy isn't growing at all outside of government stimulus.  And I'm not talking about just now when we have an anti-American, anti-free market President who is only interested in giving handouts to his special interest groups (though his numbers look pretty catastrophic now when we add over a trillion every year to the debt and only get a meager few hundred billion dollars of growth out of it), but its been happening for much of the last thirty years.  Take a look at this graph showing the growth in real GDP in billions of 2005 dollars (red line) and compare it to the growth on an annual basis of our debt in billions of 2005 dollars (blue line):

Notice that back in the 1950's and 1960's, back when America actually made stuff and government regulation of the economy was a fraction of what it is today, the economy was growing at a pretty steady clip, with very little help from federal deficits.  Then starting with Nixon and Carter, a large proportion of our growth seems to be coming from deficit spending.  In the 1980's, that's when the wheels really came off and our economy, more often than not, has grown less than the increase in our debt for the last thirty some years.  The only period when this wasn't the case was in the late 1990's when government shrank as a % of GDP and we had the benefit of a technological revolution that originated on our shores.  Take a look at the graph below that shows what our Real GDP growth would look like if you subtract out the growth in real gross federal debt (the red line is the reported rate of real GDP growth while the blue line is the debt adjusted GDP number):

It's pretty startling.  It shows that only 6 of the last 31 years were actually growth years when you adjust for increases in our debt and the last few years have essentially been like another Great Depression (something we already felt, even if it wasn't borne out in the official government statistics).

One thing that this made me realize, and bear with me on this, is that the Reagan and Bush tax cuts only gave the illusion that they were shrinking government and fixing our problems as neither President actually shrank the size of the federal government (Outlays as a % of GDP only went down marginally under Reagan and grew magnificently under W).  They made it seem like everything was okay and might have actually done harm as people felt less urgency to make the structural reforms that this economy needed to attract jobs. 

Don't get me wrong, I love tax cuts, I think taxes are essentially just highway robbery by the government, however tax cuts without spending cuts are just smoke and mirrors.  Government is still bigger than ever and eventually you will have to pay those increased deficits with increased taxes.  Republican administrations seem to have wanted the best of both worlds, they wanted to tax like Republicans but spend like Democrats, giving a double dose of Keynesian stimulus to make the numbers look good. 

But none of that was real and has delayed the reforms that we have needed to fix the system.  They were looking to maximize short term outcomes at the expense of the long term.  Instead of thinking, "hey, everything is fine, the economy is growing at 3 or 4% a year" they should have been thinking "how do we attract businesses to move their factories to the United States".  Or "how do we get America actually making stuff again"?  Perhaps without those deficit fueled booms, we might have lower regulations and lower corporate taxes today, which would keep companies from relocating to Ireland or Bermuda or moving their manufacturing to India and China.

I'm sure some liberals looking at those graphs will conclude quite the opposite of what they should conclude.  They will probably think that Obama did a great job with his massive stimulus in keeping our economy out of a deep depression.  No, what he actually did was delay the market clearing processes that are required for this economy to really get back on its feet.  And as we are seeing in Europe, chronic deficit fueled growth can't go on forever, eventually investors just stop giving you money.  Remember, when you are growing your debt by over a trillion a year, that means you need to find a trillion dollars worth of additional investor money per year.  Places like China don't even need to cut back their existing hordes of treasuries to create a crisis, they probably just need to stop adding to their hordes to create a crisis.  We are just one failed bond auction away from a real $hitshow.

Republicans need to get it through their thick skulls that they need to stop just running on tax cuts without actually limiting the size and scope of government.  They are doing our children a great disservice by doing so and should know better.  They claim to have read people like Ayn Rand and Hayek but have failed to actually put anything like that into practice.  I would try to give Democrats a lesson but I'm convinced that is a lost cause.  I actually think many of the Democratic elites are actually gunning to make America a failure and a second rate country.

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