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 ratio is low enough to let it happen.

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

3. In hard 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 political "debt ceiling" strategies, 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.

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.

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".

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.

Prosperity awaits

This post is to introduce a new paper I have written, an 8-page PDF stored at DropBox. The topic is "the debt ceiling and more." 

Actually no, that's the title. The topic is "Prosperity awaits".

Anyway, the link: The Debt Ceiling and more - A letter to my Senator

Enjoy it. Share it.

Comments on the paper are more than welcome. If you refer to something I said, please quote it so I can find it in the PDF! Leave comments here, with this post

 

///// Afterthoughts 

7:08 PM Sat, 29-Apr-2023
In the PDF I forgot to give a link to the Stephanie Kelton quote.
Robert Waldmann has it, here:
https://angrybearblog.com/2019/03/mmt-ii
Bloomberg has it here:
https://www.bloomberg.com/opinion/articles/2019-03-01/paul-krugman-s-four-questions-about-mmt

 

Will Refusing to Increase the Debt Ceiling Fix the Problem?

No.

Federal debt is not the problem. It is a consequence of the problem.

The problem is EXCESSIVE PRIVATE SECTOR DEBT.

Here's the relationship between private and public debt:

Reducing the federal debt makes the line go up, where you get depressions and such.

Reducing private sector debt makes the line go down, where good times begin. 

This page:
https://econcrit.blogspot.com/2023/04/will-refusing-to-increase-debt-ceiling.html

For the XLS file see
https://www.dropbox.com/s/fctxqugozw0p4zk/P2P%20Update%20%281916-2021%29%20by%20the%20Arthurian.xls?dl=0

Will a Balanced Budget Amendment work?

No.

Federal debt is not the main problem. It is a consequence.

The problem is EXCESSIVE PRIVATE SECTOR DEBT.

Here's the relationship between private and public debt:

Reducing the federal debt makes the line go up, where you get depressions and such.

Reducing private sector debt makes the line go down, where the good times begin.

We need a better plan

Two points to keep in mind:

• If our economy went into decline after 1973, then 2023 marks half a century of decline.
• Long-term economic decline is indistinguishable from the decline of civilization.
  
  

 
In Why Raising Interest Rates to Fight Off Energy Inflation is Counterproductive by Hielke Van Doorslaer we read that hiking interest rates, our go-to method of fighting inflation,

puts monetary policy at cross-purposes with other policy priorities (such as investing in renewables and energy-efficiency) and risks further entrenching years of public and private underinvestment. In this way prohibitive interest rates will further exacerbate the trend of secular stagnation (defined by low rates of growth, productivity, and investment) that has plagued advanced economies for at least a decade (with some even dating the onset of the declining trend back to the 1970’s).

I agree that our existing anti-inflation policy is "at cross purposes with other policy priorities". As new anti-inflation policy, I have suggested pruning back the policies that promote credit use, and creating policies that induce people and businesses to accelerate their repayment of debt by offering tax benefits for doing so. (But this is not today's topic.)

At the end of the excerpt Van Doorslaer points out that slow economic growth "has plagued advanced economies for at least a decade" and adds

with some even dating the onset of the declining trend back to the 1970’s.

This is today's topic: long-term slowing of economic growth.

A footnote attached to the Van Doorslaer excerpt links to Jack Copley's "Decarbonizing the downturn: Addressing climate change in an age of stagnation". Copley points out that "GDP growth and investment have trended downward globally since at least the 1970s".

Since at least the 1970s. Since the 1970s or before. Yep. I wrote for the blog one time since the 1960s but then I went back and changed it because people might accept the 1970s as start-of-decline, but it sounds crazy to say our long decline began in the 1960s. So ya knock off the sharp edges, and try to look sane. But it amazes me that so many people, even economists, regularly fail to see the long decline. People too often see what they've been told they see, instead of looking with their own eyes.

Copley also says

Brenner has labelled the years 1965–1973 a transition period from ‘long boom to long downturn’ (2006: 37).

And if I read Steve Keen right, Minsky put the end of the Golden Age at 1966.

Scott Sumner has said

I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.

Yeah, yeah. If the economy slowed after 1973 despite the reforms Sumner mentions, then those reforms were not the right solution. 

If you don't know how and when the problem started, what the cause really was and what the problem really is, all you can do is guess at the solution.

America has had no doubt for half a century that we must balance the federal budget. But America refuses to acknowledge that the only way to balance the federal budget is by reducing private sector debt so that the economy can grow and people can afford to live. Once we get the economy growing we can easily balance the federal budget: Easily. It will be easy. And now you're questioning my sanity again.

We've been trying to balance the budget the wrong way for 50 years. We have not restored vigor to our economy. We have not even once actually balanced the federal budget: The last time the federal debt fell was in 1969. We need a better plan.

Financialism leads to Mitchell, and Mitchell to Lim

I noted yesterday the PDF "Financialism: A (Very) Brief History" by Lawrence E. Mitchell. The Abstract at SSRN says

This essay describes various financial, economic, and legal developments in the United States from 1952 until 2007 and argues that they suggest a transformation of the American economic system from capitalism to one I term "financialism."

Mitchell puts the beginning of the process at 1952. This is the earliest date I have ever seen offered for the start of the financialization that turned capitalism into financialism. I happen to think we could go with an earlier date -- but not based on FRED's post-WWII data:

Graph #1: Corporate Finance as a Share of GDP

Clearly, however, financialization did not wait for the Reagan era to begin.

 

Mitchell writes (page 7) that Dr. Michael Lim Mah-Hui

attributes a significant proportion of the rise in what I call financialism to the dramatic increase in American debt between 1960 and 2007.

Lim uses a later start-date than Mitchell, but I don't care because he attributes the problem (or much of it) to excessive debt. He does, and it seems Mitchell does, and so do I -- heart and soul.

In Dr. Lim's paper "From Servant to Master: The Financial Sector and the Financial Crisis" (which Mitchell references) we read:

Between 1960 and 2007, financial sector debt rose an astounding 490 times, while household debt rose 64 times, non-financial corporate debt 53 times and government debt 24 times.

Evidence of imbalance; nuff said.

The irony in those numbers is that government debt -- the one America focuses on exclusively -- shows the smallest increase of them all.

Nuff said.

"Not-strong-enough-to-say-NO" is *not* the problem

From a comment by David, on "Inflation: True or False" by David R. Henderson at the Hoover Institution:

Borrowing creates money out of thin air, which is an expansion of the money supply. The largest borrower/debtor on the planet is the U.S. Treasury. In 2017, the U.S. National Debt was $20 trillion. As if that wasn't bad enough, by 2020, it had grown to $28 trillion... The driver of all that borrowing is some combination of Congress and the White House--primarily Congress, as the Treasury has no option but to borrow to pay for the excess and largess of a Congress that is not strong enough to say, "No."

That seems to be what everyone thinks: Congress or somebody is not strong enough to say "No" to government spending. When you get right down to it, that's probably why people are insurrecting.

Here's the thing: 

• Cutting government spending will not fix the problem. 
• Raising government spending will not fix the problem. 

The size of government is not the problem. I know what Reagan said:

"Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."

I know. But Reagan was wrong about why growth was slow.

 

People sometimes measure the size of government by the size of government debt. That debt is huge: inexplicably, incomprehensibly, incredibly huge.

The biggest problem with government debt, I think, is that we have lost control of it. We cannot stop the increase.

But the reason we cannot stop the increase is simple: We have the wrong solution.

Everyone thinks we have to reduce government spending. As Rush Limbaugh said:

what actually causes budget deficits [is] spending more money than you have.

But Limbaugh didn't mention income. He only mentions spending and the money we "have".

The problem is with income.

Adam Smith wrote:

Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity or, what comes to the same thing, for the price of a great quantity of theirs.

In the Project Gutenberg version of The Wealth of Nations, the phrase "what comes to the same thing" occurs 19 times. Smith must have thought the phrase important. A quantity of output comes to the same thing as the price of that output. It has the same value. In other words, income equals output.

GDP can be measured as the value of output we produce in a year, or as the value of income we earn in a year. The only difference between the two totals is due to measurement error.

The important thing, and what surprised me most in Econ 101, is that income equals output. So if GDP growth is slow it means the growth of output is slow, but it also means the growth of income is slow. And slow income growth is the kicker.

Reagan wanted to increase the growth of the economy so that income would increase. That is something we all want. How to make it happen is the question.

In my previous post I show this graph:

The graph shows the relation between the federal debt and everyone else's debt, for the US. Our debt is bigger than the federal debt, except for a few years at the end of World War Two. Our debt was more than five times the government debt in 1974 when GDP growth slowed. Our debt was more than five times the government debt in 1929 when the Great Depression started. Our debt was more than seven times the government debt in 2007, and then we had the financial crisis and the Great Recession. When our debt is too much more than the government debt, bad things happen.

Our debt was a bit over three times the government debt in 1919, and 3½ times the government debt in 1993. Our debt was not low then, but it was low enough that the economy could grow with vigor. After 1919 we had the Roaring Twenties, and after 1993 we had what Alan Greenspan called "the New Economy". Both bouts of vigor ended in disaster: high debt and disaster.

Our debt was less than the government debt in 1945, and after the war we had a "Golden Age" that lasted all the while our debt was less than three times the federal debt. We had troubles when the ratio went above three. The "Great Inflation" began around 1965, but our debt kept growing faster than government debt and the economy kept growing. Then in the mid-1970s, productivity growth slowed and GDP growth slowed and income growth slowed.

It was at this point that government debt started to grow faster. It grew slightly faster than our debt for 20 years. The red line wanders slowly downhill during those years. Finally, in the 1990s, our debt was low enough (relative to federal) that the economy could grow with vigor. 

But we always let debt-other-than-federal increase until it makes the economy go bad.

Really, the problem is policy. It's the government's job to make the economic environment a good one for growth. If you want to be angry with government for something, let it be this: not that the federal debt is too high, but that debt-other-than-federal is too high. Their policies encourage that. They should discourage it.

It is the times when debt-other-than-federal is low that economic growth is at its best. But of course the economy grows because we use credit, and our debt increases because we use credit. When our debt gets high enough, it brings trouble to the economy.

The saddest part of all this is that our solution is to reduce the federal debt. What we need is to reduce debt-other-than-federal -- just the opposite of what we are doing.

Private debt must be reduced. The federal debt will follow.