Deficits Not The Problem – They Are The Solution!

Deficits have in the modern era been the only effective tool the federal government has had in its arsenal to fight recessions, and especially serious declines such as during the Great Depression. So are federal deficits the problem today, or the solution? A look at the facts might surprise you. Below is a table that depicts the National Debt as a percent of Gross Domestic Product (GDP), for the years 1929 through 1950.

Year Debt As a % of GDP
1929 16.34
1930 17.75
1931 21.96
1932 33.20
1933 39.96
1934 40.99
1935 39.16
1936 40.31
1937 39.64
1938 43.16
1939 43.86
1940 42.37
1941 38.64
1942 44.73
1943 68.83
1943 68.83
1943 68.83
1944 91.45
1945 116.00
1946 121.25
1947 105.81
1948 93.75
1949 94.60
1950 87.63

Note that the National Debt eclipsed 120% of GDP in 1946, at the beginning of the Truman Administration – after the war ended. The tremendous increase in federal debt that began as World War II was drawing to a close, precipitated what is thought by many to be the golden age of American capitalism, from 1945 until the early 1970s.

In contrast, the debt as a percent of GDP since 2001 has looked like this:

Year Debt As a % of GDP

2001 56.46
2002 58.52
2003 60.88
2004 62.18
2005 62.77
2006 63.49
2007 63.99
2008 69.15
2009 83.29
2010 94.27

President Obama’s FY2011 budget projects National Debt as a percent of GDP to peak at 101% in FY2011 and begin to decline in the next three years. Economic historians will tell you that during the Great Depression, President Roosevelt tried deficit spending but was too tentative, and the Depression lasted for more than a decade. It was not until the enormous deficits from the early 1940s through the early years of the Truman presidency that the economy really started growing again. It also helped that a lot of soldiers were returning from the war and getting an education under the federal government’s GI Bill.

The long term structural deficit, especially continuing escalation of health care costs, must still be addressed. However, if history is our guide, the Obama Administration has not only been doing the right thing in using federal deficits to rescue and restart the economy, but the argument can be made that real danger is that they have not been aggressive enough, or will curtail federal deficit spending too soon.