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Deficits & Lame Ducks, Part 2

David R. Kotok
Sun Mar 31, 2024

Here’s my recent discussion of the deficit and debt: “Deficits & Lame Duck POTUS,” 
Some readers challenged me about the debt-GDP ratio being stable for the last 15 years. That is a fair question. The key for me is that the total debt-GDP ratio is important and not just the federal debt to GDP. While federal debt-GDP ratio is rising, the total debt-GDP ratio has been falling. It has declined about 10% from the peak in 2008.  
Here’s a chart that shows the history of this ratio. 

Total-Debt-GDP-History-Chart by


“Debt Overhang— Debt and Economic Growth,” 
Before we get to some reader responses, allow me to embellish this notion. All federal debt is a claim on all the taxpaying and potential taxpaying entities of the United States. Our government’s creditworthiness is only as good as our ability to pay what the government directs us to pay. So federal debt is indirectly our personal debt. All the rest of the debt is our personal debt or that of some entity that represents us. So, if the total declines, the whole debt burden on the entirety of US taxpaying entities declines. In other words, it is the composition of the total debt that counts. And that is where the “crowding out” research is needed. As Pogo said, “We have met the enemy and he is us.”  

Pogo - We have met the enemy and he is us

Now, here are some reader responses. 

Ed Lane: 
Thanks for this. Keeping my comments brief, I would add: 

  • Discussion of debt and deficit is incomplete without a discussion of inflation. In fact, it's inflation that matters more than deficits, per se.
  • Despite mainstream neoliberal thinking, there is little to no evidence (as you point out) that government deficits crowd out private investment. Lacking evidence, it's just a theory.
  • If Trump is elected, we can count on an effort to extend the TCJA and cut spending on Social Security and Medicare.

RSC releases FY25 Budget Proposal: “Fiscal Sanity to Save America” 
Republican Study Committee Chairman Kevin Hern (OK-01), RSC’s Budget and Spending Task Force Chairman Ben Cline (VA-06), and Members of the Budget and Spending Task Force unveiled the RSC’s Fiscal Year 2025 Budget proposal today, titled “Fiscal Sanity to Save America”. The RSC Budget is a thorough plan to address our federal spending problem and start paying down our debts. The FY-25 budget balances in just seven years, cuts spending by $16.7 trillion over ten years, and reduces taxes on Americans by $5.3 trillion over ten years.  
Google search: “fiscal 2025 extending the tcja” 

  • If Biden is elected, he aims to reduce the deficit by ending the TCJA and increasing taxes on businesses and high earners while strengthening Social Security, Medicare and other social programs.
  • Whether either Trump's or Biden's efforts contribute to more inflation or less depends on so many variables (not to mention who controls Congress), I'd say it is impossible to predict. What I can predict, however, is who will receive the greatest benefit of their policies. For that, there is evidence.

p.s. I gave the impression that you did not reference inflation. I didn't mean to. I was focusing on the Wells commentary. 
Kotok response: 
The real interest rate is positive, and the neutral interest rate (real) is falling in the post-pandemic period. I am not worried about inflation. I’m more worried about the Congress. 

D. L. :  
Question on this one …. What about interest payments on the debt? Thanks for considering my comment. 
Kotok response:  
Thank you. That is why the primary deficit is so important. It is the deficit without the interest payments. It is currently stable. The important thing is for the primary deficit to stay stable or shrink. If it does, the rest of the process will eventually neutralize unless the Congress messes it up. 

David Blond (former Pentagon economist):  
I agree with the argument that deficits are less important than many seemingly conservative people who post on LinkedIn whenever someone like the Ex-comptroller of the currency, David Walker, brings up the debt issue. I once goaded him with a suggestion that a simple solution to paying down the debt that would be fair for everyone who pays taxes (including the rich who seem to be able to avoid paying as much as the marginal rate suggests they should) to pass a graduated surtax on top of the total tax as reported on a person's personal and corporate tax returns. If you set the rate at 10% for the upper half of the income strata and 5% for the lower part of the income group and 10% for the Corporate sector and if the total intake of the government was now around $ 4.5 trillion dollars, then I figured we might get around $ 400 billion each year without any changes in the tax code (reducing the influence of special interests) and then use that to directly pay down the debt outstanding. If the Congress raised the tax a bit, then the total collected by the surcharge would increase. Since people like Walker always harped on the absolute size of the deficit, it could be used to retire the highest interest bonds outstanding immediately especially if current rates on the new T-bills were lower. It was not that I thought this necessary or even prudent, but it seemed to me that this stable, revenue source, would meet the standard better than Walker's usual suggestion – cut, cut, cut spending especially for the poor and the people who didn't give him right on's on LinkedIn. 
One final point – I used to use this when I had to respond to the many liberal anti-defense groups that I was often made to spread to. I was, after all, there when Reagan cut the taxes and doubled the rate of growth of defense. For a few years, defense spending was all that kept the economy afloat and I made many speeches to packed halls at the behest of Congressmen and women eager to show how they were helping small business to benefit from the higher spending, I would preface this with the argument – one person's debt is another person's asset. I think the massive amount of US debt is the asset base for the world economy and should be compared to the total world economy or at least a good part of it. 
Inflation was higher during the Reagan years; the Fed was far more restrictive. Reagan average deficit $ 1.75 t /10.75%, GW Bush, $3.46 t/7.98%, Clinton $ 5.2t/6.16%, GW Bush $12.65 t/4.14%, Obama $16.08/2.58%, Trump $22.86/2.02%. Based on nearly fifty years of experience with Democratic and Republican Presidents, higher levels of debt doesn’t cause high rates (low rates are a function of the fact that government has to support a weaker economy). Then what is the panic of people like the former Comptroller of the Currency, David Walker of the No Labels insanity? Then why the extreme danger that higher and higher levels of public debt seem to induce in the cadre of small business owners who populate the Republican mainstream and the popular press? 
Reagan was able to get by averaging the yearly marginal gain in GDP to gain in debt, $ 1.70 increase in GDP for each $ 1 increase in debt. Bill Clinton had an average of around $ 6.00 per dollar of debt due to running a surplus in his last year. Obama facing the deep recession of the 2008-09 period, that needed increased spending to get the economy moving again, was able to get a 65 cent return on the increase in debt, while Trump’s return on debt is just 56 cents with an average growth in GDP of less than 1% for the four years of his Presidency (Obama averaged 1.6% growth over the eight years.). So Joe Biden and the Democrats need to go big. The half a loaf offered by the few Republicans who still have a care for their constituents to get bipartisanship isn’t worth the trouble. If the plan needs to be amended, amend it to reflect priorities, like getting the money to the people unemployed rather than to everyone. Failure to spend is more dangerous than spending too much.  

Agree. Will read Wells stuff. Believing the West Point Cadet Code and that investors systematically demand a risk premium from liars and bullies (that refuse to pay debt), I will support a lame duck Biden over a lame duck Trump as the better path for containing risk spreads. 

David G. of Connecticut: 
Deficits mean nothing….Long term and short term….The Federal Government owns everything you have…. 

I saw no mention in your article to the discussion of supply-side economics according to Reagan, GW Bush, and Trump. Why?   Tax cuts, such as the 2017 Tax Cuts and Jobs Act, are supposed to expand the tax base to such an extent that the increased revenues will finance the revenue loss due to the tax cuts.  For example, as “Explaining the Trump Tax Reform Plan” (one of your sources) says, "The overhaul was forecast to significantly raise the federal deficit. The CBO estimated the TCJA would add 1.9 trillion to the deficit over a decade." 
[The following] NBER working paper is an evaluation of the 2017 Tax Cuts and Jobs Act. Quoting from the paper, "In the longer run, they dynamic effects mitigate the revenue loss but still leave a decline of roughly one-third of pre-TCJA tax revenue." March 2024 publication date by economists at Harvard, Princeton, University of Chicago, and the U.S. Department of the Treasury. “Tax Policy and Investment in a Global Economy”


David R. Kotok 
Co-Founder & Chief Investment Officer 



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