Currently there are passionate calls for drastic action to make draconian reductions to the National Debt. We have heard these calls since the recession began. The reasoning appears sound on the surface, drastically reduce the debt prior to catastrophe. Interestingly the countries that followed these tactics in 2008 have not yet equaled the growth of the US economy. Their GDP has struggled and their debt has not improved, and their economy has suffered. Eventually these countries emulated the stimulus that has slowly improved our situation. One can simply look at Japan to see a debt load that reached 250% of GDP, before they began an effort to stimulate the economy.
To understand how we got where we are today we should review our history. At the end of WWII, 1945, the US debt reached 120% of GDP, and this was during an extremely efficient wartime economy. By 1980 that debt was only 32.6% of GDP. That 35 year period included such major projects as: building a National Interstate Highway system, funding military operations in Korea and Vietnam, the “Great Society” legislative program, winning a space race and spending the USSR out of existence. Would the US have become the greatest nation on earth without the growth spurred by building a world class transportation system and the technology developed during the space race.
In contrast the following 35 years started with national debt at only 32.6% of GDP. This period ended with debt back above 100% of GDP, and no World War to blame. The question is what changed? Beginning in the Reagan administration a new economic theory was adopted, as George H.W. Bush called it in 1979, Voodoo Economics. The theory is that if you reduce taxes the ensuing gains by the wealthy would stimulate investment in the economy, thereby increasing taxable income sufficiently to offset the reduction in taxes. Everyone loved the idea of being a great nation at a discount to its taxpayers. Trouble was that the extra revenue never materialized and the nation’s maintenance went lacking. Then when wars and benefits had to be funded the funds had to be borrowed, increasing the rate of climb in our nation’s debt. Understandably people became more anxious about how to pay for what needed to done.
Our history indicates all is not lost. Our debt % has been higher, and the country was able to flourish while covering its obligations. If we return to reasonable taxes and continue to repair our infrastructure we may not eliminate the debt, but we can grow the economy to adequately service our debt. Repairing our country will spur growth and provide infrastructure for the future.
Consider that this type of growth during the first 35 year period lead to an unequalled number of middle class and what many consider to be the United States greatest period.