The Raw Truth: GDP vs National Debt

I am still mulling over the Bureau of Economic Analysis’ recent, erroneous, GDP projection after my last post Gross Domestic Product (GDP) Mumbo Jumbo. One aspect that was not addressed previously was the pace at which our National Debt is catching up to annual GDP.

The question for today is what will Gross Domestic Product need to be in 2019 in order to keep pace with the Federal Government’s ruinous spending? And based on the answer to that, at what pace must the economy grow annually?

If we add the CBO’s 2010 to 2019 projected budget deficit of $7,137.0 billion to our current national debt of $12,087.3 billion, then the National Debt will total $19,224.3 billion by the year 2019. At the same time, GDP is averaging $14,198.5 billion annually. Thus, if our economy does not grow over the next 10 years, the National Debt will soon exceed GDP. [Note: GDP represents the amount that our economy can produce in a year.]

I know that the ‘hope and change’ crowd will say, “So what, It does not matter as long as the interest payments don’t exceed GDP”, or some other lame reasoning. However, I choose to look back to the days when the economy was growing at 5% per year with low unemployment. After all, surely America had some banner years in the past. The question should be, “how do we return to a more reasonable Debt-to-GDP ratio?” Not, “how far can we go before the economy breaks?”

Thus, the first scenario, below, determines the rate of growth necessary in order for GDP to match our projected debt. The second scenario determines the rate of growth needed in order to return to the 2003 debt-to-GDP ratio of 62.8%. Finally scenario three simply states the obvious.

GDP must grow from $14,198.5 to $19,224.3 billion in order to equal the National Debt by 2019. In other words, GDP must increase by $5,025.8 over the ten year period. This represents an increase of 35.4% for the period. That means that GDP must grow at a rate of 3.54% per year in order to equal our National Debt by 2019. As I clarified in my last post, GDP is currently declining at the rate of 1.21% per year, so although this is achievable, we still have a ways to go on this road to nowhere.

In order to return to the more prosperous, albeit not the most optimal, 2003 Debt-to-GDP ratio of 62.8%, annual GDP must grow to $30,611.9 by 2019. In other words, GDP must increase by $16,413.4 billion, over 10 years, in order for the National Debt to equal 62.8% of GDP. That equals a percentage increase of 156.0% over the 10 year period. In other words GDP must grow at the rate of 15.6% per year, over the next 10 years in order to return to the 2003 Debt-to-GDP ratio.

Of course there are many possible scenarios. One common sense scenario would be to stop spending money that we don’t have. I don’t think it’s possible to grow the economy at 15.6% per year. At least I don’t see any plans from the Congress, the Senate, or Obama that would come anywhere close. In fact, their current plans do nothing to increase GDP, but rather are focused shamefully on doubling the National Debt. And you know what that means: higher taxes, and higher interest rates, leading to less economic growth.

GDP must grow at an annual rate of 3.54% in order to equal the National Debt by 2019, a road to nowhere. GDP must grow at an annual rate of 15.6% in order to return to the 2003 Debt-to-GDP ratio of 62.8% by 2019. Government spending needs to be cut dramatically, and immediately. Any plan that falls short of scenarios #2 and #3 is not a plan. That’s the raw truth.

Some time ago in response to an article about healthcare reform I published a reply which I reproduce below. I would like to add a few thoughts to that reply. The Opposition from Democrats during my lifetime to any attempt to reduce spending ran up against the reality that Democrats could buy majority in our state and federal legislatures by buying votes with taxed or, even better from their point of view, borrowed dollars. We were able to postpone the reckoning because the economy grew at a sufficient rate to keep the ratio of GDP to debt at low enough levels which the financial markets would tolerate. Growth kept the party going.

Republicans were always at a severe electoral disadvantage by playing Scrooge and declaring the sky was falling. The electorate was always happy to accept the most transparent delusions in order to keep the party and their entitlements coming. The episode about George Bush's attempts to reform Social Security described in the reply below is only illustrative of the dynamics that have got us into this entitlements mess over decades.

Indeed, I think this dynamic is the major reason why Democrats have been the major party since the Great Depression. The reality is that their commitment to government solutions has become the accepted norm in our society when it comes to actual practice. When a politician such as George Bush tries to stand this paradigm on its head and reform Social Security, the power of the entitlement siren delivers a brutal object lesson which other politicians are quick to study. Even a politician with a spiritual commitment to fiscal sanity and who was possessed of the most remarkable set of public relations talents like Ronald Reagan could not succeed in structurally reforming the system.

These remarks are by way of addressing your trenchant observation, "Living in reality, I know that this asinine spending will occur until we get badly burned and we learn a lesson." I fear your observation is true because it is a true observation of human nature.

Here is the reply:

We know all this for some time which, of course, does not make the author's warnings any less urgent. We have known that the entitlements are going to bust the entire structure. We knew that when Bush sought to reform Social Security, we knew then that the real problem was Medicare. But at least Bush took an entitlement on. However, he had no moral footing to do so, having established two more entitlements with prescription drugs for the elderly and medical care for children.

Bush attempted a free market fix for Social Security and that was entirely unpalatable to the Democrats because it went for them in the wrong direction. As Obama's plan for the reform of health care clearly demonstrates, Democrats idea of reforming entitlements is to engorge government.

It is correct to say that the American economy cannot get healthy unless healthcare is reformed. But that is speaking too generically because the matter is more properly and precisely defined as fixing Medicare. So Obama is lying in that he shortens the time line, pretending that nationalizing health care is necessary for a recovery from this economic slump rather than to avert a looming problem down the road. And he is further lying when he says the problem is a matter of general health care rather than the more limited problem of the entitlements. Yes, healthcare is a mess which beleaguers the economy but it is a problem because it has been distorted by the entitlements.

These lies are necessary because of the mindset of Democrats described above; Democrats will countenance no reform that does not engross government.

Correction:

Scenario #2 – Back to 2003

In order to return to the more prosperous, albeit not the most optimal, 2003 Debt-to-GDP ratio of 62.8%, annual GDP must grow to $30,611.9 by 2019. In other words, GDP must increase by $16,413.4 billion, over 10 years, in order for the National Debt to equal 62.8% of GDP. That equals a percentage increase of 116.0% over the 10 year period. In other words GDP must grow at the rate of 11.6% per year, over the next 10 years in order to return to the 2003 Debt-to-GDP ratio.

Scenario #3 – Stop Spending Money that we don’t have.

Of course there are many possible scenarios. One common sense scenario would be to stop spending money that we don’t have. I don’t think it’s possible to grow the economy at 11.6% per year. At least I don’t see any plans from the Congress, the Senate, or Obama that would come anywhere close. In fact, their current plans do nothing to increase GDP, but rather are focused shamefully on doubling the National Debt. And you know what that means: higher taxes, and higher interest rates, leading to less economic growth.

Conclusion

GDP must grow at an annual rate of 3.54% in order to equal the National Debt by 2019, a road to nowhere. GDP must grow at an annual rate of 11.6% in order to return to the 2003 Debt-to-GDP ratio of 62.8% by 2019. Government spending needs to be cut dramatically, and immediately. Any plan that falls short of scenarios #2 and #3 is not a plan. That’s the raw truth.

1) Iraq added relatively little to the debt and you know it. Entitlement spending, PERIOD, is the overwhelming cause of the debt.

2) I love how people cite Thomas Jefferson, who was the FIRST president to dispatch an overseas military campaign, without a declaration of war, using the very ships that he opposed (built under Adams) to declare war on several states that did not declare war on us (only the Bey of Tripoli did).

Jefferson literally sent EVERYTHING WE HAD, nearly 100% of our army, navy, and marines, based on a joint resolution, with no clear goals or objectives. Oh, by the way, we won.

Time for some people here to quit the Bush bashing. The fact that they transferred 500 TONS of enriched uranium out of Iraq alone made the war more than worth it; the fact that in the process we sucked in perhaps 60,000 jihadists from all around the world and killed, captured, or wounded almost ALL of them---which would have been impossible if we'd had to confront them in individual states---was not only a genius of a plan, but decades later it will be viewed as the only real approach to the WoT.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.