Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Tuesday, June 16, 2015

How Mythical is Reagan's Debt?

J. W. Mason makes the excellent - and largely unrecognized - point that the great majority of the federal debt increase during Reagan's term was due to high interest rates rather than a combination of reduced taxes and high spending.  Fair enough, but I think he takes this observation too far when he says:
 If something everyone thinks they know -- Reagan's budgets blew up the federal debt in the 1980s -- turns out not be true, it's worth pointing out. Especially if you thought you knew it too.

However, it's also worth pointing out that Reagan's budgets really did blow up the federal debt - high interest rates at the time just made this a whole lot worse.  J.W.M. is looking at surplus or deficit as a % of GDP.  Conclusions based on ratios always make me want to take a different look.   There may not be much distortion from a denominator effect in this specific case, but a close look at the primary budget [total budget less interest payments] results tells a rather different story.

Graph 1 [click to enlarge] illustrates the total budget Surplus or Deficit [red] along with the primary S or D [blue] for the years 1950 to 2000, in billions of dollars.

Graph 1 - Total and Primary Budget S or D, Billions


For the period in question, this does not look substantially different from JWM's graph, with data as percentage of GDP.

Graph 2 shows only the primary budget surplus or deficit for the same time period.

Graph 2 - Primary Budget S or D, Billions

The years 1981-88, Reagan's term, are highlighted in Red.  For no good reason, the Nixon-Ford and G. H. W. Bush terms are in yellow.  Reagan's primary budget deficit of $118 billion in 1983 was 2.5 times larger than the previous record of $47 billion of 1976.   For the next three years, the primary deficits were $74.3, 82.8 and 85.2 billion, respectively.

Cutting across this a different way, Graph 3 shows the accumulated S or D since 1950, in billions, with Reagan's term highlighted in red.  Reagan is responsible for 86.47% of total primary deficit accumulation from 1950 through the end of his term.

Graph 3 - Accumulated Surplus or Deficit, 1950 to 2000

In fairness, Reagan's last two years added very little to the accumulated deficit.  But there is no denying that his profligacy was dramatically different from that of any previous president.

Despite my perhaps niggling disagreement with JWM, his post is well worth reading, and I recommend it highly.  His point about interest rates is just as relevant to today's situation as it was to circumstances three decades past.  Here is his closing thought.

If high interest rates and disinflation drove the rise in the federal debt ratio in the 1980s, it could happen again. In the current debates about when the Fed will achieve liftoff, one of the arguments for higher rates is the danger that low rates lead to excessive debt growth. It's important to understand that, historically, the relationship is just the opposite. By increasing the debt service burden of existing debt (and perhaps also by decreasing nominal incomes), high interest rates have been among the main drivers of rising debt, both public and private. A concern about rising debt burdens is an argument for hiking later, not sooner. People like Dean Baker and Jamie Galbraith have pointed out -- correctly -- that projections of rising federal debt in the future hinge critically on projections of rising interest rates. But they haven't, as far as I know, said that it's not just hypothetical. There's a precedent.  
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Data Source Link


1 comment:

The Arthurian said...

Quoting Mason: "If high interest rates and disinflation drove the rise in the federal debt ratio in the 1980s, it could happen again."

In his post, Mason attributes the Big Deficits of the '80s more to high interest rates than to disinflation. It must be emphasized, however, that interest rates were made high on purpose, in order to bring the disinflation about.

If you just run the numbers, maybe they come out the way JW Mason says. But if you look at economic forces I think you cannot say the problem was mostly high interest rates.

Sorry if the above is off-topic, Jazz. But like you, I have many little troubles with Mason's point of view.