Tuesday, January 28, 2020

How Rich Folks Explain the Explosion in Our National Debt

A Forbes Magazine article questioning the sustainability of our ongoing deficits and rising debt popped up on my News Feed on January 27 2020.  Forbes is a magazine whose core editorial mission seems to be to celebrate the gathering of excessive wealth as the penultimate human virtue.  But I read part of the article anyway, glad to see someone was concerned about the National debt.

I quit reading when it became apparent they were focusing the blame for our high National debt on President Nixon's decision to take the dollar off the Gold Standard in 1972 and were pointedly avoiding any mention of the reduction of the top income tax rates to below 40% initiated by President Reagan in the early 1980's.  This despite the fact in the decade after we dumped the Gold Standard in 1972 the National debt actually shrunk.  It wasn't until President Reagan start cutting taxes on the wealthy in the early 1980's that the National debt reversed course and began its inexorable rise.

I have no issue with the criticism of dumping the Gold Standard in 1972.  When the dollar was on the gold standard governments could not just pile up debt because excessive debt caused the value of the dollar to deteriorate against other more fiscally responsible countries.  Taking the dollar off the gold standard sent us off into uncharted territory - the Fed maintaining permanent low interest rates by printing money resulting in continuously rising levels of debt by government, business and consumers.  Today every kind of debt is at historically high levels. 

These days when there is a hint of a possible economic downturn, the  Fed just prints more money to keep interest rates low,.  We don't know how this ever rising debt scenario will play out.  It is hard to imagine it will be good, but the permanent low interest rates also inhibits the traditional reality checks on excess - depressions and recessions.  Japan provides a possible model, 40+ years of low interest rates, ever increasing national debt, and weak economic growth.  A nation stuck in economic stagnation.  

But leaving the gold standard is not the cause for out debt explosion since 1983.

From 1933 to 1983 the very wealthy faced much higher tax rates on excessive income - the highest rate averaged 70% on the income far above what the middle class earned.  During that period the National debt ended where it began, at 30% of GDP, and we enjoyed unprecedented prosperity at all levels of society.   

Since the mid 1980's the top tax rate has always been below 40% and the National debt exploded even as GDP growth has been mediocre, homelessness has exploded, home ownership has shrunk - virtually every economic measure documents a less powerful and inclusive economy.

I guess the folks that subscribe to Forbes who celebrate the accumulation of vast wealth as the highest human virtue probably don't want to hear that concentrating wealth in the hands of a few actually impoverishes society.

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