In 2002 when soon-to-be-dismissed U.S. Treasury Secretary Paul O’Neill warned then Vice President Dick Cheney that the Bush administration’s tax cuts would drive up deficits and threaten the health of the economy, Cheney famously answered: “You know, Paul, Reagan proved deficits don’t matter.”
In the wake of the recently approved federal tax cut,voices concerned about the damage that deficits will do are rising again.
What’s curious is that since Cheney’s rebuke of O’Neill, growing federal government deficits seem not of have mattered. In fact, the largest deficits ever boosted the economy after the 2008-09 recession, exceeding $1 trillion annually for four years.
All of this suggests that the federal government has for a long time been operating under an unspoken monetary theory, namely, that government spending does not need to be backed by revenues and that the debt issued to fill the gap between spending and revenues will have little effect now or in the future.
But isn’t there some level of federal debt which would cripple the federal government and the U.S. economy? A common metric for measuring this debt is the ratio of federal debt to annual gross domestic product (GDP). When one looks at a graph of this, the growth in debt seems perilous, rising from a low of around 30 percent of GDP in the early 1980s to more than 100 percent of GDP today.
Seemingly more perilous is the rapid growth in Japanese government debt. That debt has soared from a low of around 40 percent of GDP in 1990 to almost 200 percent of GDP now. Yet, the oft-prophesied demise of Japanese government finance has not occurred.
…click on the above link to read the rest of the article…
