President Obama and the Exploding National Debt

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Credit Out Of Control

Who wouldn’t want to drive this around if they had no worry about paying for it? Image credit: Cobra bubbles

Consider how your lifestyle could change if you had the ability to obtain whatever you wanted, whenever you wanted it. Cars, boats, fancy mansions, diamond-studded dog collars could all be yours, regardless of whether or not the price was right. All you had to do was borrow easy money to acquire them, and not only would you never be turned down, but you could even borrow more easy money every year to help pay the payments from the debt incurred during the previous year.

That scenario is obviously an exaggeration, but is in essence what has happened with respect to government spending since World War II.  U.S. government outlays were about 20% of GDP just after the war, but have steadily increased ever since, to roughly 40% today. And remember – the government has only balanced its budget 12 times since 1940, so spending relative to the size of the economy as a whole has doubled without the corresponding revenues to pay for it.

Significantly driven by ballooning government expenditures, the economy has increased in the aggregate by an average of approximately 3% per year. Although that number doesn’t leap off the page, keep in mind that aggressive fiscal policy has artificially lengthened the business cycle.

Normal episodes of contraction have become more and more scarce, with just three official recessions over the past 30 years. With growth arguably stimulated beyond normal organic metrics due to government spending, two significant results have occurred: 1) standards of living have improved substantially, and 2) in corollary, the national debt has risen dramatically.

Obama’s Debt Spike

President Obama’s first term began just as tax revenues were falling from an economy that was in virtual free-fall. Tax revenues were roughly $2.5 trillion in 2008, but just $2.1 trillion in 2009. Meanwhile, expenditures rose from $3.0 trillion to $3.5 trillion during the same time frame.

Stimulus spending, fighting two wars and approved budgetary outlays that could not be quickly unwound all played roles in the worsening of the federal budget deficit, which topped $1.4 trillion that year. The subsequent three years showed modest improvement, but government revenues still remained below 2008 levels at the end of 2012, while growth in expenditures has slowed, but not reversed itself.

Obama and the Congress’ culpability in the burgeoning national debt is correlated with three important factors: a tepid economic recovery, an overall political unwillingness to adopt the same austerity much of Europe has already undertaken in order to reign in spending, and Keynesian stimulus efforts undertaken during the past four years to avoid another Great Depression.

As with most issues today, the politicians have differing views as to the weighting of each factor, as well as the steps necessary to solve the problem.

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