Debt Crisis dependent on Income

Recently, I have noticed comparisons between Reagan and Obama with the handling of their respective economies.  By some graphs, Obama compares favorably.  For example, Reagan grew the debt by 70% in his first term and almost tripled it by the end of his second term.  By contrast, Obama has increased the debt about 60%.  But this is only half of the story.  It is like learning that Tom has $5 million in debt but not knowing his income.  If his income is $10 million a year, then his debt is very low but if his income is $100,000, he is in serious trouble.  With that in mind, let's look at the income side of Reagan vs. Obama.

In Reagan's first term, the economy grew about 40%.  Yes, the growth in debt outpaced GDP but the debt was only 40% of the economy; the GDP was nearly $4 trillion while debt was $1.6 trillion.  By 1988, the debt had grown to $2.6 trillion, which was 51% of the economy.  Not good, but not a crisis.  The trajectory was in the wrong direction.  Whereas the increase in debt under Reagan was mitigated by GDP growth, Obama has had an anemic expansion of only 7% since 2008.  Thus, his comparatively lesser increase in debt is not offset by economic growth.

Looking at spending, Reagan saw a 44% expansion in the government at the end of his first term.  A large part of that was his military buildup for the Cold War but there was a lot of other spending as well.  Obama is only spending 20% more than was spent in 2008.  That makes Obama sound downright conservative.  But, taking into account the growth in income, Reagan's expansion was only moderately larger than his 41% growth rate whereas Obama's government expansion triples his 7%.  As obvious as it sounds, more income allows for more spending.  Reagan had more income while Obama doesn't.

So, looking only at one aspect, one might commend Obama for holding the growth of debt and federal spending below Reagan.  Image that Fred and Joe both make $50K a year.  Four years later, Joe has $200K in debt while Fred only has $150K in debt.  Sounds like Fred is the responsible one, right?  Until you learn that Joe got a promotion and makes $100K a year while Fred was downsized and now only makes $30K a year.  Joe's debt is double his income while Fred's is catastrophic at 500% of his income.  Changes the story, doesn't it.

Obama has had the misfortune of bad timing. Reagan had room to grow the debt; it was only 33% of the GDP when he inherited the Carter economy. Obama had little room for debt expansion since it was already at 70% and has rocketed over 100% during his term. Moreover, the Baby Boomer retirement is at hand and the income streams of Social Security and Medicare are starting to reverse course.  However, he knew this from the start and wanted the job anyway.

We’ve made sure to do everything we can to dig ourselves out of this incredible hole that I inherited.

Barack Obama, February 23, 2012

The buck stops here.

Harry S Truman