US Debt now > GDP

Oltz

As of yesterday our National Debt surpassed our GDP. Comments?


Those opposed to a balanced budget amendment must know that this symbolic landmark puts us on track to a place we can not recover from.

We need to end deficit spending until our Debt is below 35% of GDP and we need an amendment capping our debt at 45% with a 10 year average balance requirement of 30%.

(as in we can borrow money in bad times up to 45% but need to pay off the additional in time to maintinain the needed average)

The only way to do this is to cut spending and decrease overhead. Taxes alone can not solve this problem.

phyzguy

While I agree we need a credible plan to get the Federal Government income more in line with the expenditures, it's not clear that this debt=GDP threshold is a real danger area. It has happened before - after WW2 our federal debt reached ~120% of GDP, and the world didn't end. In fact the post WW2 period was a period of rapid economic growth. Wikipedia has some nice charts:

http://en.wikipedia.org/wiki/United_....22_of_debt.3F

Oltz

I believe it was During WW2 that the debt spiked to 120% but with in 5 years was down to 80% and ~60% in 10 years and ~40% in 15 years.

Not the same situation at all IMO as I do not believe our Government is capable of cutting the Debt in half in 10 years.

phyzguy

So it sounds like you agree that the problem is not the level of debt per se, it is the inability of our government to take action. This is what we must address. Remember this next November!

Oltz

Take a look at this graph and note that it is from 2007 and keep in mind how much the debt and interest on it have grown

What the graph forecast as happening in thw 2030's will likely happen before 2025

We can cut every dollar the Govt spends that is not SS Medicare/caid and Interest and still not be reducsing the debt.

It is not the inability of our government to take action it is the over commitment of resources we do not have.

Now think about the ~47% of the population that recieve benefits from those programs and the fact that we have reduced contributions to SS for the past 2 years.

Do you think the people will let our Government take any action that is substantial enough to end this cycle?

No matter how you tax a population its been shown that you do not receive more then ~20% of GDP in revenue.

phyzguy

Note that the problem is not really the increase in spending on benefits, it is the large increase in interest payments (the red bars) because revenues are not keeping pace with spending. It only takes a manageable increase in taxes to keep this scenario from happening.


This is nonsense! Most industrialized economies generate more tax revenue than this. See below for example. All we have to do is raise taxes to a level matching our expenditures and we will be fine. It is the repeated tax cuts that have gotten us into this mess.

http://en.wikipedia.org/wiki/List_of...centage_of_GDP

Oltz

I believe those are Total Revenue's not Income tax Revenue. My mistake for not being clear in what I ment.

This link has some interesting charts that show what I mean.


http://www.businessinsider.com/histo...tax-rates?op=1
As does this one

http://itsaboutliberty.com/index.php?topic=1242.0
Or you can generate your own at
http://www.usgovernmentrevenue.com/d...ent%20of%20GDP

mheslep

I disagree. The spending problem now is different now in that the spending is structural due to entitlements. Wars end. In WWII everybody, especially those lending money to the federal government, knew the war and the war related spending would end. People do not take to the streets and burn things down when proposals to reduce war spending become law, unlike proposals to reduce entitlements, as demonstrated recently in Europe. Entitlement spending is planned to continue with no end. Lenders know this, making the debt load (which is periodically rolled over) dangerous.

John Creighto

Why does this graph forecast no increase in revenue?

mheslep

Given that the interest on just the current debt could jump from $200-$400B to ~$800B with a rise in interest rates, yes the current debt load itself, today, is a problem.

Oltz

As I was trying to show in a Previous post regardless of income tax rate changes through history Federal revenue has remained static at ~20% of GDP. Hence revenue as a percent of GDP is flat.

In general the other revenue the government takes in is directly related to specific projects that are self funding.

Think of income tax revenue as the Disposable income of the country.

dacruick

How long would it take for a countrywide sales tax increase of 1% to solely pay off the debt?

Oltz

That depends on if you include food,shelter,clothing and utility purchases.
Does it also tax wholsale or is it retail only?
Do bussiness purchases count?
Can you tax the same good more then once?
Are components taxed when they are sold or only finished products?

Short answer a very long time.
Depending on the answers to the above questions and several others you can also anticipate some pretty serious secondary effects on the economy.

John Creighto

Oh. Okay. I should have looked at the graph closer. I'm not sure what percentage of the GDP you can bring in as tax revenue. Anyway, you should lay out the assumptions which produced the graph:
1) What interest rate is assumed?
2) What growth rate in GDP is assumed?
3) What birth and death rates were assumed?
4) Was Medicare cost assumed to remain constant per person per age group or will technology raise or lower cost?
5) Will the retirement age remain the same?
Also keep in mind that even small differences in revenue could make large differences in forecasts by the way debt compounds.

Now as for the original thread for numerous reasons I don't think things are the same now as at the end of World WII. I discussed some of these reasons previously in another thread:
http://www.physicsforums.com/showthread.php?t=528582

There seems to be some consensus that debt levels of 120% GDP are sustainable for countries which can’t inflate their way out of it. Countries which have control over their currency have sustained higher debt levels without problems. Japan is an example of this.

dacruick

I know that there are some bounds missing in my question, but lets say that you tax anything that is bought retail, and yes you tax the same good twice. And yes to food shelter clothing and utilities.

I don't think a 1% increase in price is going to stop anyone from buying anything, so I may have to disagree with the "serious" secondary effects on the economy. Unless these serious secondary effects include an angry population. Americans and tax get along just as well as Coca-Cola and Mentos.

FlexGunship

Just as a side note after reading the discussion... it does seem to be universally true that 20% is the maximum that can be taken in by taxes without mandatory work programs. As taxes rise economies shrink...

The misconception is the classic fallacy of "the increase is so small no one will notice." Any increase, no matter how small, pushes SOMEONE below the poverty line or causes SOMEONE to lose their home, or causes SOMEONE to give up insurance.

EDIT: I should mention that I also don't think of this as some historic landmark in our economy. Stagnant economies increase debt. Hopefully debt doesn't increase stagnation of economies.

dacruick

I don't believe that is entirely a fallacy. I see your point and I agree to a certain extent, but a 0.5% sales tax increase isn't really going to deter anyone from buying something that they need/want.