On the growth of healthcare, housing, and education cost as a share of GDP

From Gallup: "No Recovery: An Analysis of Long-Term U.S. Productivity Decline". Jonathan Rothwell, Gallup Senior Economist.

https://news.gallup.com/reports/198776/no-recovery-analysis-long-term-productivity-decline.aspx

Hey, the Gallup PDF includes a graph showing long-term economic decline, right there on the cover. I'm big on long-term economic decline, so I can't help but like the paper.

Gallup asks: "Why is growth down?" They summarize several different explanations and say "There is no consensus among economists or other experts as to why growth has slowed." 

Gallup concludes: "Political forces, not technical or scientific ones, are now the chief restraints on growth." This is what happens when economic theory incorrectly explains the economy, and economic problems become everyone's problem: People start to think the problem is political. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. The problem is not political. It is an economic problem with an economic solution.

 

Under the heading "The Key Sectors Dragging Down Growth" we read:

Here, the focus is on the key period between 1980 and 2015 when the slowdown in GDP growth per capita began. Over this period, private and public spending on housing, healthcare and education soared, and these sectors absorbed a larger share of GDP, going from an already substantial 25% to an enormous 36%. Of these, healthcare saw the largest jump, increasing from 9% to 18%.

Between 1980 and 2015, housing increased one percentage point, from 10% to 11% of GDP. Education increased by one percentage point, from 6% to 7%. Healthcare doubled, from 9% to 18% of GDP.

These sectors where spending increased as a percent of GDP, I'm calling them high-spending sectors. I was going to call them "high-priority" sectors, but that seems to contradict the Gallup paper. They emphasize that the high-spending sectors reflect not only "a shift in spending" away from other sectors, but also increasing prices. This is effective writing:

The Bureau of Economic Analysis produces price indexes by industry, and these price indexes show rapidly escalating prices. Education is 8.9 times more expensive in 2015 than in 1980. Within education, higher education specifically is 11.1 times more expensive. Healthcare costs 4.8 times more than it did in 1980, medical insurance costs 8.7 times more and housing 3.5 times more. Thus, the shift in spending toward education, healthcare and housing cannot only reflect increased demand...

 Yeowza!

 

The cost of Gallup's high-spending categories increased from 25% of GDP in 1980 to 36% in 2015. But notice that they show their high numbers relative to GDP -- and GDP growth is slow. So I have to ask: How much of this apparent increase in the high-spending is really due to the slowdown of GDP growth?

All of it!

Using the same "Golden Age trend" values I used for my recent federal-debt-to-GDP post, the high-spend number for 1980 drops from 25% of GDP to 23.1%. For 2015 the number drops from 36% to 22.2%. If GDP growth had continued at its 1946-1974 rate, our spending on healthcare, housing, and education would have been a smaller percentage of GDP in 2015 than it was in 1980! The big change is the slowdown in GDP, not the increase in healthcare, housing, and education.

This should give you an idea how serious the long-term economic decline is. But economists don't even talk about it. They tell "long boom" stories instead.

Let me go back to that quote about the Bureau of Economic Analysis and the "rapidly escalating prices". I'll start where I left off:

... Thus, the shift in spending toward education, healthcare and housing cannot only reflect increased demand. At a per-unit level, prices have also increased, driving up the share of spending on these products. This suggests that something is holding back supply.

Something is holding back supply.

The phrase "something is holding back supply" is code for "cost-push" inflation. The combination of reduced supply, slowing growth, and rising prices indicates that there is cost pressure driving the inflation. Or, you know, to keep the "there's no such thing" people happy, the answer to the question "Why is growth down?" is cost pressure. The Federal Reserve finds itself having to "print too much money" to get the little economic growth that it gets, and it has targeted "two percent inflation" to prevent outright economic decline.

Prices are being "forced up", as Henry Hazlitt said, to the point that "they force an increase in the money supply." Hazlitt's words. That's Hazlitt's words. Hazlitt, for the "no such thing as cost-push inflation" people.

Despite all the inflation we've had, economic growth is still slow and still getting slower. I call it long-term decline. So does Gallup. And come to think of it, John Cochrane worries about long-term decline, too. And since it's not just me, this at least hints at how serious the cost pressure problem is.

Oh, and by the way: The cost pressure arises from the growth of finance. We can reduce the cost pressure, reduce inflation, and improve growth by reducing the accumulation of private-sector debt until prosperity emerges.

Or we can wait it out and become living proof that civilizations die by suicide.

The Long Boom

I found an article from the Hoover Institution: "The Ten Causes of the Reagan Boom: 1982-1997" by Martin Anderson, from 1997.

There was a boom that started in 1982? Is it in the old data, maybe? The first thing I did: I went to ALFRED and compared the current GDP data to GDP data reported in 2001. The graph shows the plotted line beginning to thicken during the 1982 recession, as the red and blue lines begin to separate. The separation is visible shortly after the 1991 recession. And by the end of the 2001 data, the difference between the red and blue lines is 22.8 index units. The change is gradual and small. In my notes I wrote "No remarkable differences."

When I sat down to write this thing I wondered why did I use 2001 data? I did the graph over, this time comparing the current GDP data to GDP data reported 30 January 1998. This is the first data vintage that shows all four quarters of 1997 -- the year Martin Anderson wrote his article.

This time the graph shows the plotted line beginning to thicken in the latter half of the 1970s. The separation is visible by the end of 1984 on my screen. And by the end of 1997 the difference between the red and blue lines is 56.4 index units. The difference on this graph is almost 2½ times the size of the difference using the data reported in 2001 -- and the bigger difference developed in three years and nine months less time!

Still, the current GDP data runs higher than either of the others. And the 2001-reported data is higher than the 1998-reported data. But Martin Anderson wouldn't have been using the 2001 data when he wrote the article in 1997. I figure he was using the lower reported values.

But even using the low values, he thought he saw a "boom" -- and other economists thought they saw a "long boom". The introductory statement below the title of Anderson's article reads:

In the United States the fifteen-year economic expansion that began in 1982, now called "the long boom" by economists, is the greatest economic boom in history--and it is still going.

I never heard of the long boom. So I looked it up. I found

The Long Boom: A Vision For The Coming Age Of Prosperity Paperback – October 1, 2000, by Peter Schwartz, Peter Leyden, and Joel Hyatt, at Amazon....
https://www.amazon.com/Long-Boom-Vision-Coming-Prosperity/dp/0738203645

And I found

"The Long Boom That Wasn’t — and What We Can Learn" by James Pethokoukis, March 2023, at AEI.
https://www.aei.org/articles/the-long-boom-that-wasnt-and-what-we-can-learn/

Felt better when I found that one!

 

Pethokoukis links to "a 1997 essay by Peter Schwartz and Peter Leyden" on the Long Boom, and says:

Broadly, the rapid productivity and economic growth of the late 1990s didn’t continue into the 21st century as they and many others of that time predicted.

Then he comes up with a list of ten things Schwartz and Leyden offer as 

 “scenario spoilers” that could “cut short the Long Boom.”

One of those ten items seems to me to be the real economic show-stopper:

“New technologies turn out to be a bust. They simply don’t bring the expected productivity increases or the big economic boosts.” 

"Nailed it," Pethokoukis says. But he lists nine more. To me most of those are consequences that arise from economic failure, like crime, like tensions between China and the US, and like the failure to deal with global climate change. People always focus on things that are problems for themselves, or things that are problems for society. But almost no one focuses on things that are problems for the economy. And those are the problems that need to be fixed... I'm thinkin monetary imbalances.

I had a similar response to Martin Anderson's list of ten. The one that struck me as close to correct was this one:

Monetary policy is next on the list. During the past fifteen years our country has been blessed with two of the best leaders the Federal Reserve System has seen: Paul Volcker and Alan Greenspan. Overall, monetary policy has been stable and predictable and inflation has been low, which has been a powerful factor in ensuring steady economic growth. That kind of sound, dependable monetary policy is essential for long-term economic prosperity.

Anderson tells what he wants from monetary policy: stability, predictability, and low inflation. I agree that "sound, dependable monetary policy is essential for long-term economic prosperity." I do not agree that Anderson captures sound policy in his paragraph. Nor do I think that Volcker and Greenspan had "sound" policy. It was good, far as it went, but it left things out.

I've said it before: Volcker and Greenspan, and bankers in general, think like bankers. They think debt is a good thing because they are in the lending business and that's how they make their money. So there is never a time when they are going to say the financial sector is too big. There is never a time when they are going to think there is just too much private debt in this economy. The bankers will never be first to argue that we must seek the level of debt that best promotes economic growth. But if they ever come to support such a plan, there will never come a time when they add and we have far too much debt already.

"Too much debt relative to the quantity of money" is a monetary imbalance. (And remember, you cannot use credit to reduce your debt.)

New technologies, no matter how good they are, turn out to be a bust when people don't have the money to spend on them. Why did the tech boom not happen until the latter 1990s? Because starting in the mid-1980s there was the Savings and Loan Crisis, which slowed the growth of debt significantly. And then in the early 1990s there was a substantial increase in the quantity of M1 money, the money that people spend. By the mid 1990s we had more money to spend, and we had less debt to hold us back. That is why the tech boom happened at that time, and why our economy was so good, at that time.

Among the features of the decline of civilization...

It is easier to find a profound new analysis of the economic problem than it is to find someone who can appreciate it.

The Tides of Prosperity

The graph shows three periods of prosperity: the Roaring Twenties, the Golden Age of Capitalism, and the New Economy of the latter 1990s.

Shooting from the hip, I figure 9 years of prosperity in the Roaring Twenties, 25 years during the Golden Age, and 6 for the New Economy. That's a total of 40 years of prosperity out of 100 years (and more) shown on the graph.

Forty good years, sixty bad years. We can do better. It should be easy to do better. The graph provides clues:

1. Prosperity only happens when the plotted line is going up. The line goes up when private debt is growing faster than public debt. But prosperity does not begin until the line is low enough to let it happen.

2. When the plotted line gets too high, prosperity gives way to troubled times. 

3. In troubled times, there is no relief until the plotted line is low enough for prosperity to begin again.

These things, the graph shows. What the graph does not show is that the Republican "debt ceiling" strategy, by forcibly reducing federal spending, will ceteris paribus increase the private-to-public debt ratio and move us away from the low that we need to reach so that prosperity can begin again.

Help me take this message viral.

Gross Federal Debt as a Percent of Actual and Golden-Age Trend GDP

The graph uses annual data, so there is nothing yet for 2023. 

The graph shows the federal debt for 2022 as 121.1% of GDP (blue).

It shows the federal debt for 2022 as 65.7% of what GDP would have been (red) if GDP growth had not fallen behind its 1946-1974 exponential trend.

In other words, if  GDP growth continued at the 1946-1974 rate, the gross federal debt (as of 2022) would be less than 66% of GDP, not more than 121%. (I did not change the Gross Federal Debt numbers.)

I'm not saying the low percentage is realistic. I'm saying it would be realistic if policymakers knew what they were doing and could maintain decent economic growth.

So anyway, all this nonsense about the debt ceiling... but if GDP kept growing at its 1946-1974 trend, our massive federal debt today would be only about half the size it is, as a percent of GDP.

 

People who complain that the federal debt is too big unfailingly offer "percent of GDP" numbers as proof of their claim.

But those same people say GDP growth is too slow and, well, they are right about that. But then to turn around and show the federal debt as a percent of this slow-growing GDP, well, it makes the federal debt look bigger than it really is. So those people are either liars or just plain stupid.

It's not that the federal debt grew all that fast! The federal debt grew, yeah, but not as fast as it looks, because GDP growth has been so slow for so long! As a percent of GDP, the gross federal debt would be only about half what it is today if GDP had maintained its 1946-1974 growth rate.

Hey, here's my spreadsheet, at DropBox.

For the irony. And for the "debt ratio"

I searched Google Scholar for "analysis of federal debt growth" (without quotes). On the first page of results I found "In Search of an Optimal Debt Ratio for Economic Growth" by David J. Smyth and Yu Hsing, at Wiley, from Contemporary Economic Policy, Volume 13, issue 4 (October 1995). I had high hopes.

From the Abstract:

Results also indicate that the optimal debt ratio is 38.4 percent for debt held by the public and 48.9 percent for total debt. Thus, the current (1993) debt ratios of 50.9 percent for the debt held by the public and 68.2 percent for total debt are far greater than the desirable levels.

With percentages like that, and especially as they mention "debt held by the public", I figure when Smyth and Hsing say "debt ratio" they mean "federal debt relative to GDP"... or maybe relative to GNP, as their data is from 1993. (The change from GNP to GDP as the standard measure occurred in the early 1990s, I recall, but I am fuzzy on the exact date.)

Anyway, my snide remark of the day is this: As the ink was drying on their report, the "new economy" of the latter 1990s was just getting under way!

The new economy of the latter 1990s is the one Alan Greenspan described in 1998 as "without question, one of the best economic performances in our history". So we got super-good growth even though Smyth and Hsing say the ratio of federal debt to GDP is "far greater" that it should be for "optimal" economic growth to be achieved. The economy proved them wrong.

See, I think they are using the wrong debt ratio. I think they should have used the debt ratio that I have been showing lately, the private-debt-to-public-debt ratio.

But even if I'm wrong about their debt ratio and my debt ratio and things in general, it is still true that we got optimal-or-better economic growth almost immediately after Smyth and Hsing said the debt ratio was preventing that outcome. I love the irony!

"Polarization"

From Economic Harmonies by Frédéric Bastiat (1850) at the Online Library of Liberty:

As great as is the difference between the plowshare that feeds and the sword that kills, so great must be the difference between a nation of workers and a nation of plunderers. It is not possible for there to be any common ground between these two. They cannot have the same ideas, the same standards, the same tastes, the same character, the same customs, the same laws, the same morality, or the same religion.

 

1850 was part of the period that Keynes called 'the greatest age of the inducement to investment". It was around to the peak of the Cycle of Civilization, as I see it. From that lofty point, Bastiat could see great differences  between societies.

We also can see such differences. But we are beyond the peak and near to what no one dares call a "dark age". So we don't have to imagine those differences. We see them every day, as we are in transition from the high of the cycle to the low.

If you stand at the North Pole and I stand at the South, we both stand on our feet. But if I could see you, I would see that you look upside-down, as you would me. Each of us thinks ourself rightly positioned on top of the world, and the other guy all wrong.

 

The problem is economic decline. When we cannot get right by righting the economy, we lean into it, we become disoriented, and  we find ourselves  we find the other guy not only wrong but inexplicable.

The only solution that I can see is to improve the economy to the point that everyone wants to be part of it. Only when the economy is good can we see eye-to-eye.

Small-picture solutions don't solve big problems

We've been mopping up water on the kitchen floor for fifty years now. Does anyone think we should have been looking for a leaky pipe?

After fifty years of failure, am I the only one who says balancing the budget by cutting federal spending is the wrong plan?

People say it is spending in excess of revenue that creates deficits. Even economists say it. It is true, of course. The arithmetic is correct. But it is a small-picture view.

The trouble with the small-picture view is -- Surprise! -- it doesn't show the big picture. If you balance your budget, it can affect your favorite restaurant because you don't go out for dinner anymore. It can affect the deli where you no longer stop for coffee on your way to work. That's three small pictures: yours, the restaurant's, and the deli's. Your small-picture view ignores two of them. Or dozens of them. Or hundreds. But those dozens or hundreds then have to consider adjusting the small picture of their budgets. And that can affect you, or your neighbor, or dozens or hundreds more people. And so on.

That's a glimpse of the big picture.

If you spend a dollar, it has a ripple effect. If you don't spend a dollar it has a ripple effect. Everything that happens in the economy affects the economy. The big picture is not as simple as "spending in excess of revenue".

Raising taxes and cutting spending impact everyone's small picture. If there is an imbalance in the big picture, a monetary imbalance perhaps, then small-picture solutions, at best, only move the problem to someone else's budget. Like when you squeeze a balloon at one and it gets bigger at the other. Or like the whack-a-mole.

Fifty years and counting. It is time to re-think the plan. We need a plan that will work.

GW Message to the House of Representatives: Pay without Delay

George Washington, 1793, Message to the House of Representatives:

"No pecuniary consideration is more urgent than the regular redemption and discharge of the public debt: on none can delay be more injurious, or an economy of the time more valuable."

from Treasury Direct: History of the Debt. Look under "The 18th Century".

Thomas Palley interview in Jacobin

At Jacobin: The Forgotten Case Against Milton Friedman: An interview with Thomas Palley

I love it when economics is exciting! Right from the opening paragraph, I love the Palley interview.

Heh, right from the title I love the interview. Every case against Milton Friedman rises immediately to the top of my reading list. 

And I think Palley's informal title of the interview is even better than the title Jacobin used. Thomas Palley calls it "Inflation, the Phillips curve, and the forgotten case against Milton Friedman". 

When I came to this part, I had to repeat it here:

"Well, if you go back to the early 1960s, there was a widespread belief that there was a systematic trade-off between inflation and unemployment that policy could use. People believed in the “structural Phillips curve.” Friedman questioned the long-run existence of that trade-off using very conventional economic theory."

And then:

"As I interpret it, the economics profession willingly went along with the story that Friedman was right. And there’s a reason for that. Friedman had based his case on conventional theory."

And the zinger:

"And the economics profession is not in the business of challenging conventional theory. In fact, the exact opposite is true. It’s in the business of defending conventional theory."

Palley also says:

"In my own work, I talk of the “backward bending Phillips curve,” which generates an optimal rate of inflation that I call the minimum-unemployment rate of inflation or MURI — the rate of inflation that will deliver the minimum unemployment rate. I think that is what policy should aim for. And I would say it’s somewhere between 3 percent and 6 percent."

Well you know I'm gonna have something to say about that!

Financial Soundness Indicator, Nonfinancial Corporations; Total Debt as a Percent of Equity, Level

An interesting item:

https://fred.stlouisfed.org/series/BOGZ1FL010000286Q

Since 1980 it looks like this:

Financial Soundness riding high, up near 100% since the financial crisis put FearOfGod into the nonfinancial corporate sector.

Yeah maybe, but this is how it looks since start-of-data:

I always want to know what happened before that!

Hypocrisy and irrelevance

A thought on the Debt Ceiling nonsense:

“This impasse is not about debt. When America’s debt to GDP ratio went up by 40% to bail out Wall Street, the Republicans did not even squeak.”

Yanis Varoufakis, 2013

A similar thought, left by a friend years ago on my old blog:

“A large portion of public sector debt was recently absorbed [from the private sector] by the public sector.”

Nanute, 2011

To me, these are statements about the hypocrisy of the players in the game of risk that we call "the debt ceiling crisis". The practice of claiming to have moral standards or beliefs to which one's own behavior does not conform, the dictionary says; pretense. Sounds right to me. Hypocrisy.

By the way, you can see it happen: Everything goes along normally, right up to the end of 2007. Then suddenly, in 2008, everything changes direction. The increase of financial debt suddenly drops off, and the increase in the federal debt surges as the government steps in to limit the severity of the collapse:

Graph #1: Annual Change in Federal Debt (red) and the Financial Sector (blue)
Note that debt is measured as end-of-period values.
Everything looks fine, right up to the end of 2007.
Then suddenly, in 2008, Finance cuts its losses and
the government has to step in to limit the disaster.

The vertical gray bar represents the recession. Financial sector debt (blue) drops from near a 15% growth rate, to zero and below. Maybe we should call that a "shrinkage rate".

Now, we can't know for a fact what would have happened if the government didn't step in. But it is clear to me that it would have been a disaster, like the Great Depression that my dad lived through, and his parents. My dad was ten years old when that Depression hit.

We can't know for a fact, because this time that fact didn't happen. But our economy was bad for years after the recession shown on the graph. We still had not recovered, we still were not back to "normal" even by the time of covid. Remember people talking about "the new normal"? That's not the same as normal. We never fully recovered.

It had to be done. What the government did, it had to be done. Could it have been done better? Of course, but that's not the question.

And now, after the financial crisis and the disruption that followed, and after the covid pandemic where, similarly, the response was necessary if imperfect, now there are tantrums in Congress. Now the government is held up as irresponsible for doing the responsible thing.

Now, the federal debt is held up as evidence of irresponsibility. Hypocrisy is exactly the right word.

I tripped over Nanute's observation, went looking for more, and found Yanis's statement. They are right, you know. Yes, the federal debt was high even before covid and yes, high even before the financial crisis. But nobody is subtracting the government's responses to those problems from the federal debt. No one is making allowances for those emergencies. No one is just trying to be decent.

Let me say yes, our federal debt is a problem. Yes it is. But for me, the problem is not that that the debt causes, well, whatever it is the tantrum people say it causes. I don't accept those stories. For me, the federal debt is a problem because we cannot stop the increase, not even briefly. We are not in control of it. I am tempted to say that the economy has a mind of its own, and it is making the federal debt increase... and nobody believes that the economy has a mind of its own, so nobody can figure out what must be done to stop the increase.

It's almost like we refuse to listen to the economy. We refuse to try to understand it. We know the economy is bad and that is all we know. And, you know, I think maybe this obtuseness on our part is what spread to the political world so that now we refuse to listen to each other. We refuse to try and understand each other. We know those guys are assholes and that is all we know.

And that seems to be the only thing the two sides agree on.

 

My view of the Debt Ceiling discussion is this:

Our economic problems are not caused by the Federal debt. Debt other than federal is the cause. Excessive private-sector debt is the cause of our economic troubles. If we reduce private-sector debt so that the economy can grow, the federal debt will come down easily.

Our economic problems are not caused by the Federal debt and deficits. Balancing the Federal budget will not solve the problems. Therefore, the whole "debt ceiling" argument is irrelevant.

Irrelevant.

Nanute's view, and Yanis's, is that the move to limit federal spending by such a drastic measure is blatant hypocrisy.

These two arguments are the strongest of all the arguments against the Republican tantrum nonsense. Hypocrisy and irrelevance. 

That about sums it up. Hypocrisy and irrelevance.

Private Debt, per Dollar of Public Debt

Revising and re-posting mine of March 29, 2012

I'll just go with the newest version of the Private-to-Public-Debt graph: 

Graph #1: Dollars of Private Debt per Dollar of Public Debt

When the line goes up, times are good:

 • 1920-1929, The Roaring Twenties
 • 1947-1973, The Golden Age
 • 1994-2000, The Macroeconomic Miracle

When the line is too high, times are tough:
 • 1929, start of the Great Depression.
 • 1974-1993, Small ups and downs here, suggesting only brief "good" periods.
 • 2008, start of the Great Recession.

When the line peaks there are problems:
 • 1929
 • 1974
 • 2007

When the line falls dramatically there can be a Depression.

When the line goes up, times are good. But when the line is high, times are tough. This is the stuff that cycles are made of.

My idea is to use policy to keep the line flat, somewhat like 1974-1993 on the graph, but to keep it flat at a much lower level, a level where the economy constantly wants to grow vigorously. We may not get Golden Age growth that way, but long-term growth will be better that way than any other way. And it will be sustainable growth. It will be the quasi-boom.

I expect you know who said this:

The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.

That's the end of the old post. By the way, this topic comes up lately because the Debt Ceiling is in the news. The purpose of the debt ceiling, political bluster aside, is to reduce the growth of the federal debt. But if you spend a moment with the graph you can see that when private debt is high and federal debt is low, the one relative to the other, times are hard. I'm not making this up. It's in the data and it's on the graph.

We also know from experience since the 1970s that increasing the federal debt (and federal spending and all that) does not make the economy better.[1] So we cannot solve the problem Stephanie Kelton's way, by setting public spending "always to the level required to achieve full employment" and accepting "whatever deficit may result." We've seen insane increase in the federal debt for half a century, and for half a century economic growth has been slowing. We cannot solve the problem Kelton's way.

The idea that we need more federal debt is only half a thought! We need more federal debt relative to debt-other-than-federal. This could happen easily, without increasing the federal debt, if we sufficiently reduce debt-other-than-federal -- our own debt. I'd like to see new policies that encourage us to pay down our debt more quickly and help us afford to do it. As an alternative, perhaps, a massive debt forgiveness, but I have trouble picturing that.

As a practical matter, I think we should expect continued increase in federal debt while we transition to a lower-private-debt economy. After the transition, we will be able to whittle down feddebt without creating problems.

It's a good plan. But we need policy to make lower-private-debt happen, because existing policy works the other way. Existing policy does everything possible to increase the availability and use of credit, because policymakers think credit helps the economy grow. They think using credit helps the private sector grow.

But that too is only half a thought. Using credit helps the private sector grow if we are not already overburdened with debt. But we in the private sector ARE already overburdened with debt. We have been overburdened with debt for two generations now. That's why the economy got slow in the mid-1970s. And it's why increasing the federal debt has not improved the economy since the mid-1970s. 

It is the policy of always encouraging more use of credit that created the problem.

What policy has to do now is encourage us to pay down debt faster than normal. We have to offset all the policies that caused the excessive use of credit. And because policymakers let things get so bad, the new policies must do more than encourage us to pay down our debt. Those new policies must help us pay down our debt.

Think of it as a mistake. They thought their policies were good for the economy. And they were right: the policies were good, until debt started to be a problem. We knew debt was becoming a problem, probably before the 1990s we knew. But the rich guys that make the policies, they didn't see a problem. They were probably collected the interest we were paying!

Think of it as a mistake. They didn't realize how bad things were getting at our end. So they kept using their stupid rule -- the "credit is always good" rule -- to try and make things better. And I guess when more interest payments started rolling in, things did seem better, to them.

But not to us. So we need the new kind of policy, the kind that helps us pay down our debt, to reverse the effects of credit-use policy. And it was their mistake, so they should pay for it. Policy has to help us whittle down our debt. If it doesn't, the economic vigor will never return.

Now might be a good time to talk to your congressman about this, because the Debt Ceiling is in the news. If that takes effect, and the the growth of the federal debt is reduced, it'll push us up higher on the graph, and the only solution then will be to reduce private debt even faster to get the ratio down.

Worse comes to worst, another Great Depression could do the trick. But I don't want to go there.

 

NOTES

[1]: A big federal debt and big deficit spending make things better for some people and some businesses. Maybe for many. But the federal debt and deficits do not improve the economy's ability to make things better for people and businesses in a way that makes the big debt and deficits no longer necessary. Thus I say that increasing the federal debt "does not make the economy better". Certainly the goal should be to restore economic vigor -- and the pursuit of Happiness --so more people have a better chance to earn a decent living. The goal must not be only to help us cope with a disappointing job, a disappointing income, and a disappointing life.

The Ten Biggest Increases in the Federal Debt

A couple of cautions. By "increases" I mean percent increase, not dollars or billions. And here we look at both the "federal" debt (for the years 1947-2022) and the U.S. "public" debt (for the years 1917-1970). I figure the "public" numbers include debt for all levels of government.

Public Debt

Source: Historical Statistics

The two largest increases in public debt of the 1916-1970 period are over 100%. In 1917 the increase was bigger than the whole existing debt at the end of 1916. 1918 again, this time even bigger than the accumulation thru 1917.

After those two WWI-related increases, there are three from WWII. These are well below 100%.

Next, one more year from WWI, then two more from WWII, and finally two from the Great Depression. That's the top ten.

Federal Debt

Source: FRED

For the federal debt, the biggest increase of the 1946-2022 period was the pandemic-related increase of 2020. Nowhere near the 100% level, the pandemic debt increase was nonetheless almost 25% of the total federal debt existing at the end of 2019.

Coming in a close second is the increase of 1975. I'm thinkin Wow, the 1974 recession was a severe one. 

The two next-largest increases are related to the "Great Recession" that followed the financial crisis a decade and a half ago. 

After that, 1982: another severe recession. Then one more for the Great Recession, followed by three increases following that of 1982, and one for 1976, following up on the 1975 increase.

Yeah, it is true that by looking at the size of the increases we lose sight of the size of the total accumulation. That still catches me by surprise every so often.

The data on public debt is from the Bicentennial Edition of the Historical Statistics, Chapter X.

The data on federal debt is from FRED. I'm using FGTCMDODNS, a measure of "credit market" debt. This is equal to neither the gross federal debt, nor the debt held by the public; it runs between those two measures.

I wanted to look at these numbers because I have never seen them shown this way, in order by size-of-increase. It really makes the "problem years" stand out.

ReBlogging 'A Pictorial History: Private and Public Debt'

I first posted this back in March of 2016. Ten graphs, all the same image but with different yellow highlighting. Later that same day, netbacker posted the graphs on Twitter and added some text -- and a lot of meaning -- to them.

Recently I posted a one-graph version. Now, since the topic came back, I figured I'd re-post the 2016 version. I'm including netbacker's text above each graph.

A Pictorial History: Private and Public Debt

1. The graph shows the size of private debt, as a multiple of public debt, for the years 1917 to 2014:

This graph shows the level of private debt relative to the level of public debt.
Or you could call it Non-Federal debt relative to Federal debt.
The older (blue) data are from the Bicentennial Edition of the
Historical Statistics. The newer (red) data are from FRED.
All these images use the same graph, with different highlighting.

2. The Ratio of Private to Public Debt Fell During World War One. Public debt rose faster than Private debt:

The Ratio of Private to Public Debt Fell During World War One

3. After the War, the Roaring Twenties. Private Debt rose faster (lower debt burden at start) than Public Debt:

After the War, the Roaring Twenties

4. The Great Depression and World War Two. Shows previous raising Private Debt isn't sustainable, eventually crashes:

The Great Depression and World War Two

5. After World War Two, a "Golden Age". Having deleveraged, Private sector is again ready to take on more private debt:

After World War Two, a "Golden Age"

6. Beginning Around 1974, Two Decades of Sluggishness Ensued. You guessed it - private debt burden begins to hurt again:

Beginning Around 1974, Two Decades of Sluggishness Ensued

7. Beginning Around 1994, a "Goldilocks" Economy. Good Years. - Clinton surplus leads to overburdened Private debt:

Beginning Around 1994, a "Goldilocks" Economy. Good Years.

At this point, Netbacker added an info box about the (not too hot, not too cold) Goldilocks years: 

8. Since 2000, Slowing Growth. An overburdened private sector couldn't take on more private debt:

Since 2000, Slowing Growth

9. The 2008 Financial Crisis and Aftermath. Private sector debt Deleveraging at Max Speed:

Crisis and Aftermath

10. Time for A New "Goldilocks" Economy? Does history Repeat or does it Rhyme?

A New "Goldilocks" Economy?

THANKS AGAIN, NETBACKER! Your words add so much to my pictures.