An ordinary citizen's analysis of our economic situation.

This is not a professional paper, a PHD thesis in economics,
just the view of an ordinary person developed over decades of
watching the economy and 63 years of life experience.

America's national debt is over $14 trillion dollars. Our
national debt is nearly equal to 90% of our entire economy as
measured by the GDP. This percentage is known as the debt load.

The deficit has become pretty much the only real focus of one
political party, and much of America. The Blade published a
cartoon portraying the debt as a house of cards. Debt and
deficit are a continuing point of dispute in the media. Yet
should the debt and deficit be so much the focus? Is it going to
burden our children and our grandchildren? Let me lay out a
scenario for you.

It is shortly after the war on two fronts have ended. We have an
unemployment rate going up and veterans coming back often to
jobs that no longer exist. The national debt has exploded,
rising to 110% of our GDP, and we are coming out of one
recession and heading into another.

Consider that, then ask, is this our future?

I don't know, but I do know, this is our history. This is our
past. This is the world I was born into.

In the year 1947, when I was born, World War Two had recently
ended, millions of men were coming home, not the hundreds of
thousands of this war. The debt was equal to 110% of our
economy, which was down from the 122% of just a year before. It
was a world war, though, so we had to face that. We had a
recession in 1945, and another in 1948. Sounds pretty bad,
doesn't it.

Though the actual numbers were low compared to today, the
percentages were worse. After all, we have a vastly larger
economy today to deal with that debt. Which is like being able
to afford a larger mortgage because you have a larger income.

Still, the debt at 110% of GDP was much more of a debt burden
than we have today. Yet we did survive, and prosper.

According to the Federal Budget History files, 2010: At the end
of WW2 the debt load was almost 122% of GDP. It went down under
every president, war and peace, recession or prosperity, liberal
or conservative, republican or democrat, from 1945 until it was
down below 33% in 1980.

What was the key? Many I have talked to about this say we did
it because the US was nearly untouched by the war, but Europe
and Asia were devastated. From 1945 to 1960 that might be the
explanation, but by 1960 Europe and Japan were pretty well
rebuilt and coming back. Yet the debt load went down. By 1970
Europe was thriving, and Japan was gaining a reputation of an
economic champion. Still the debt load went down. When 1980 came
around Japan was famed as an economic powerhouse, and Europe was
strong and growing. In spite of which the debt load went down,
until 1980.

I believe it went down because Americans were working and
producing and creating the wealth that built the economy and
brought down the debt load.

In 1980 the debt burden was 33% of the economy, the GDP. By the
time Obama took office it had gone up to pushing 90% of the GDP,
and approaching $12 Trillion.

So, Obama was handed an economy that was in recession and at
risk of another depression, fighting two wars, and a debt load
that was headed for crushing. If the country went into
depression the GDP could drop as much as 50%. The debt would not
drop, so the debt load would become horrendous. 90% jumps to
180%. Higher than this country has ever seen. If the GDP dropped
25% that still pushes up the debt load back to the WWII level of
120%.

This is also history, except that we survived it that time.
From 1929 to 1933 the nation's GNP went down 46% Back then they
used GNP instead of GDP, but the numbers are close enough for
our purposes.

The GNP went down, but the debt didn't. They don't reduce your
debt just because your income goes down. So the debt went from
16% of GNP to 30% before one more dollar was borrowed. In fact,
more money was borrowed, it was the depression remember, so the
total debt went to 40% of GNP. Still low by today's standards,
but remember, by 1980 our debt load of 33% was near the 1929
level.

All of the increase in the debt load from World War II untill
Obama took office was accumulated under three anti-tax
presidents. That's 100%. Every other president brought it down.

In looking at the growth of the national debt I found the fact
that it doubled in some president's terms interesting, so I
looked into the factor of debt multiplication. In looking at
this I was focusing on short term multiplication, first in 10
year increments, then in presidential terms. What I found was,
there are long stretches where the debt doubles slowly, and
short periods where it multiplies. From 1929 on though, slow or
fast, it's up almost continuously.

Looking back to the middle of the 1800s till today I find
periods of multiplication, over short periods, with similar
characteristics. I have concluded there are only two causes
associated with debt multiplication, war and recession. We have
both.

So, how do we cut the deficit, and the growth of the debt? And
how fast do we have to do it? In 1936 recovery from the Great
Depression was well along. At that point FDR was persuaded to
try to reduce the debt, by cutting back on his "stimulus"
programs. In 1938 economists were writing up articles on why the
nation went back into recession in 1937. The nation didn't
recover to it's 1929 level until 1941, just before WWII began.
So when to cut back is a crucial matter of timing.

From 1960 until 2001 federal spending ranged from 17% to nearly
23% of GDP. It was running in the 18% range in the late '90s.
After 2001 it went up hitting near 25% by the time Obama took
office.

These are important numbers. Remember, the common standard for
a recession is two quarters of declining GDP. Not quite
accurate, but we can work with it. With federal spending at 25%
of GDP, any reduction comes right out of GDP. Normal GDP growth
is targeted at the 3% range. Much more than that and the Federal
Reserve starts haveing fits. A 10% cut would mean 2.5% off the
GDP. Cut 20% and you cut 5% off the GDP, which is instant
recession. Do we want to go that way?

Any reduction of federal spending means shifting the economy to
the private sector. Moving back to the pre-2001 levels requires
a balanced shift to avoid bringing the recession back. And that
means economic recovery. With unemployment as high as it is, the
only way we will manage that sort of shift is with job growth.
Not just jobs, but well paid jobs.

There is no way we are going to achieve that in a reasonable
length of time through the new economic thinking. The
information based or green based economy will not develop enough
good jobs fast enough to do the job. We need to bring back
industry to this country. We need to manufacture what we
consume. That does not require a revolution in our educational
system or our regulator system, it requires a revolution in our
thinking.

Back in 1967 the Wall Street Journal reported a poll of
Republicans showed 60% thought free trade was bad for America.
Many of us have held to the call for Fair Trade, not Free Trade.
That is the solution.

Until we can do that, the only agency that can keep this
country afloat is the federal government. The federal
government can borrow money to keep the system from collapsing,
the states cannot. If the states start going under, if layoffs
are resurgent, we may yet see a depression. Whether we can
recover from that is uncertain, this time.

Are our children and grand children going to have to pay for
this? Yes, just like we did. The question is how will they do
it.

The only fix for our problem is jobs, well paid jobs. Any
tinkering with the federal budget to try to solve the debt
problem with cuts will probably just agravate the problem.

Jobs are the problem. Jobs are the solution.

BOB KLAHN bob.klahn@sev.org http://home.toltbbs.com/bobklahn

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