Menzie Chinn directs our attention to a report from the JEC Democrats. Menzie focuses on the causes of the switch from unified surpluses to unified deficits over the past five years. Shorter Menzie – it’s those tax rate cuts.
Menzie gets it right (as usual) and all I would change about the chart he provides from the JEC memo might be to provide the upswing in the General Fund deficit. Actually, table 1 provides the data showing that the Federal debt was $5.7 trillion as of January 2001 and was $8.4 trillion as of April 2006. The debt held by the public was $4.8 trillion as government accounts (e.g. the Social Security Trust Fund) held the rest.
Debt held abroad has more than doubled from the $1 trillion held as of January 2001. Granted that this represents the increase in nominal debt and with the price-level increase being about 12.7%, the real increase in Federal debt held abroad is only 81.3%. We often hear about how the Chinese are purchasing US Federal debt, but it turns out that Japan is accumulating even more of our debt. We also hear about the OPEC nations purchasing US Federal debt, but the UK actually ranks third behind Japan and China.
The JEC report also charts the fact the debt is rising faster than GDP and notes:
A growing federal debt and growing international indebtedness are signs of the looming debt crisis. However, a sense of complacency may have set in because many of the predicted consequences of rising debt and the abandonment of fiscal discipline are not yet evident in the performance of the economy. So far, the main adverse consequence has been the sharp decline in national saving, which has not had much of an effect on the economy in the short run but will depress living standards in the future. To be sure, the U.S. economy has experienced a business cycle recovery since the recession of 2001 and there has been a cyclical improvement in the budget deficit. How-ever, the argument about the adverse consequences of bud-get deficits is about the harm from embedded structural budget deficits, and they persist. In fact, the tax cuts that the Administration and its supporters are touting as an important contributor to the recovery were poorly designed to provide job-creating stimulus in the short run, while they have added to the structural budget deficit in the long run. The recovery owes more to the natural resiliency of the U.S. economy and the policies of the Federal Reserve than it does to those tax cuts.