People often misstate the dimensions of things, and lengths can be especially prone to exaggeration. But fortunately, we have ways of revealing exaggerations. We just need to find the right data and the best way to look at it, which is the idea behind this series of articles.
I’ll wield a ruler, so to speak. I’ll answer seven questions, choosing from the possible answers in the right hand column of the diagram below. For each question, I’ll present research that’s intended to shed some light on the possible effects of our economic imbalances – primarily our soaring government debt but I’ll touch on others as well. And I’ll tie the topics together as we get closer to the end.
In this article, you’ll find my answer to the first question – “How long has it been since our debt problem was this bad?”
Uncovering the magic of the late 1940s and 1950s
If you’ve read any of my previous articles and came back to read this one, you probably share my concern about America’s skyrocketing public debt. But you may also be wondering just how serious a problem it is. After all, we had even more debt at the end of World War II, and we did okay then.
If this is what you’re thinking, my advice is to think again. The decades after World War II shouldn’t give you any comfort about our situation today, and I’m about to show you why.
In fact, I’ll do it in just two charts. I’ll add some commentary after the charts – to show that I can list differences between the 1950s and the 2000s. If you’re feeling nostalgic, please read the whole piece. But if you just want to know why the World War II episode of excessive debt is virtually irrelevant, have a look at the first two charts below and then move on to the next part of your day.
To create the first chart, I removed defense spending from past budget data to calculate what I’ll call the “non-defense budget balance.” And then I aggregated the figures over periods of mostly ten years, except for the 1940s on the left (where I isolated World War II) and the last two years on the right.
These simple calculations reveal the magic behind the debt reduction of the late 1940s and 1950s: take away the military and the budget was already under control. We only needed to bring the soldiers home, return the factories to civilian use, keep up the discipline and watch the debt fall. If only it were so easy today. But it’s not easy today and the trend on the chart shows why. Even Truman and Eisenhower would have had a difficult time coping with the non-defense budget balances of recent years. And our current elected officials are no Trumans and Eisenhowers.
The next chart shows the same idea with more information. The squares represent the same data as the bars from the first chart: the non-defense budget balance. But I added triangles showing defense spending.
The math works like this: when the triangles are above the squares, the overall budget is in deficit; and when they’re below the squares, it’s in surplus. Okay, they never actually fell below the squares on this chart. But you can see that we cut the deficit to zero in the late 1940s and 1950s by reducing defense spending to non-world war levels. We then lost some of that discipline in the 1960s when deficits became normal practice, pushing us down the slippery slope that eventually led to the over trillion dollar deficits of 2009 through 2012.
The second chart reinforces the point that we can no longer fix our debt problem by just bringing the soldiers home. Defense spending is less than 5% of GDP, compared to 29% during World War II. What’s more, our military is comprised of professionals, not conscripts, and the wars that we’re fighting no longer begin with a congressional declaration and end with a surrender, truce and treaty. There may be a modest reduction in defense spending if we tone down our war mongering and no-one attacks us. But it won’t be a very large reduction, especially in relation to the deterioration in our non-defense budget balance. We would need to cut into the bone to fix the deficit, and there’s no sign of that happening anytime soon.
Let’s get nostalgic…
Now for the list of differences between the post-World War II period and today. The non-defense budget surplus is the most obvious reason for the debt reduction after the war, but there were other reasons as well. Rapid economic growth, full employment and strong income gains helped expand our tax base and reduce debt in proportion to the economy’s size.
Real growth averaged 4.3% per year in the 1950s and 1960s, more than a full percentage point higher than in any decade since then. Unemployment averaged 4.6%, which is about a percent lower than in any decade since then. And most impressively, median family income roughly doubled in the twenty years from 1949 to 1969 (and I mean net of inflation). In the 42 years since then, it’s grown all of 19%.
It may be a very long time, if ever, before we can match the economic advantages that we enjoyed after World War II. Here are a few of the factors that help to explain the growth, employment and income performance noted above:
Unusually high household savings. Households sharply reduced consumer spending during the war, especially on big ticket items, in favor of investments to support the war effort such as war bonds. The household savings rate averaged 19% between 1940 and 1945, nearly three times the average post-war rate of 7%. The accumulated savings helped to fuel consumption in the years after the war’s end, when frugality gave way to pent-up demand.
Ample capacity for borrowing. Deleveraging in the 1930s and high savings during the war left private sector debt at only 38% of GDP in 1945. At that time, both households and businesses had an unusual capacity for additional borrowing. Household borrowing grew at a real annual rate of 13.7% from 1946 to 1949, then at a real rate of 10.1% during the 1950s and 5.7% in the 1960s. Borrowing by businesses grew at real rates of over 6% in both the 1950s and 1960s. These growth rates – for both households and businesses – haven’t been matched in any subsequent decade. And they certainly won’t be matched in the immediate future, with private sector debt standing at 251% of GDP at the end of 2012, over six times the 1945 amount.
Strong trade fundamentals. By exiting the war with our productive capacity intact, we had a distinct advantage over most of our trading partners. Rebuilding nations in Europe and Asia were short on capacity and turned to us to fill in the gaps. Exports reached nearly double imports between 1946 and 1949, as we quickly retooled from defense-related production to peacetime goods and services. The playing field gradually leveled, but we retained our position as a net exporter until the 1970s and foreign sales helped to create jobs and boost profits in a variety of industries.
Innovation and commercialization. Engineering advances in manufacturing and agriculture were especially strong in the 1950s and 1960s, boosting productivity and output. In addition to new inventions, engineers increasingly commercialized the numerous inventions of the first half of the 20th century, after a long period in which commercialization was constrained by the war and, before that, a lack of adequate financing and risk taking during the Great Depression. For example, while few homes had televisions, washers, dryers and air conditioners in the difficult times of the 1930s, they became standard amenities in the post-war years. Other innovations included direct dial long-distance calling (first tested successfully in 1951), modern highways (the first superhighway was the Pennsylvania Turnpike, opened in 1940, and the interstate system was initiated in 1956) and jet travel (Boeing’s 707 began service in 1958 and Douglas’s DC-8 in 1959). Experts have argued that recent innovations are much less transforming than the many engineering gains of the 1950s and 1960s, especially as today’s economy is dominated by service sectors with low productivity growth.
Rising levels of education. When young people receive better educations than their parents, they’re expected to be more productive, with the benefits accruing over their working lives. (Unless the education is from a modern, graduate economics program, in which case the opposite holds true.) These benefits appear to have helped boost the economy in the 1950s and 1960s. Consider that the percentage of 17 year olds earning high school degrees rose from 17% in 1920 to 70% in 1960, while the percentage of 23 year olds with college degrees jumped from 3% to 18% over the same period. Our workforce in the decades after the war was much better educated than earlier generations, and also well-suited for the make-up of the economy. And today? Not so much.
All of these factors help explain the sharp decline in debt in the decades after the war, which is shown in chart below:
As seen in the chart, the difference between today’s debt and the post-World War II high is almost 20% of GDP (122% in 1946 vs. 105% in 2012). But don’t be fooled by such a simplistic comparison. Not only is the non-defense budget balance much lower than it was in the late 1940s, but the economic environment is far more challenging.
Think of post-World War II policymakers as skiers perched at the top of a debt mountain, but one covered with perfectly packed snow and a selection of easy trails back to the lodge. By comparison, today’s policymakers are stuck in a crevice. And in the big picture, the crevice is much deeper than any that we’ve ever encountered.
To answer the question, “How long has it been since our debt problem was this bad?” I’ll choose “none of the above.” Never before has our challenge been as daunting as it is today.
Overall economic performance in the 1950s and 1960s: CYNICONOMICS calculations using data from the Bureau of Economic Analysis, Bureau of Labor Statistics and the Bureau of the Census.
Household savings: CYNICONOMICS calculations using data from the Bureau of Economic Analysis.
Capacity for borrowing: CYNICONOMICS calculations using data from the Federal Reserve.
Trade fundamentals: CYNICONOMICS calculations using data from Historical Statistics of the United States: Colonial Times to 1970, Bureau of the Census.
Rising levels of education: CYNICONOMICS calculations using data from Thomas D. Snyder, ed., 120 Years of American Education: A Statistical Portrait, National Center for Educational Statistics, U.S. Department of Education, Office of Educational Research and Improvement, 1993.