American Economic Performance – the Envy of the World

We just celebrated “Black Friday,” the day in America where everyone goes out to participate in the great merchandising splendor of post-Thanksgiving Christmas shopping! We should feel very blessed to be able to champion such a day where we typically spend somewhere around $8 billion, not for various necessities of life, but for gift-buying items like video play stations and plasma TVs. It serves as a true mark of America’s unrivaled success in economic prosperity, but for all of our free enterprise success do we fully understand the political dimensions of our economic health?

The United States is the number one economy in the world. Our gross domestic product, now over $13 trillion, is greater than that of all the countries of the European Union combined! The average state in the U.S. has a higher GDP per capita than any of the EU countries. In fact, France, Italy, Great Britain and Germany, each have a lower GDP than all but four of our states. At their best, the EU productivity rates can only reach the level of states like Arkansas, Mississippi and West Virginia. The U.S. not only has a greater output, but it’s increasing at double the pace- 4% compared to an anemic 2% for the EU.

There was much talk during the recent elections regarding our government’s spending problems and how it relates to our national debt and deficits. The statements were almost universally condemning and fraught with dire warnings, but how much of this caterwauling is true? As with most things, a bit of contextual comparison is in order, to best understand the issue.

The National Debt is best viewed by its relationship to a nation’s output, or GDP, ie. “debt” as it compares to one’s ability to pay. In 1945, the U.S. had a debt to GDP ratio of 121% and now, it’s half of that at 64%. By comparison, the average American has a ratio of Household Debt to Annual Income of 110%. In other words, most Americans carry a debt, ($51,062.02 on average), that is more than their annual take home pay. This explains why, since 1985, bankruptcy filings have gone up over 400%. Using only Mortgage debt for consumers, the ratio is still very high at 80%. Thus, Americans are more leveraged than the government they criticize for fiscal irresponsibility! In terms of other industrialized nations, the U.S. is in better shape than Germany, France and Italy. Japan, for instance, has a Debt/GDP ratio of 164%!
Contrary to the opinion of the political-opportunists: the sky is Not falling!

Over the past forty years, America’s average Deficit to GDP ratio has been at 2.3%. (The Deficit is the annual shortfall of debt, as opposed to the National Debt which is the overall accumulation of deficits for all fiscal years.) With the surprisingly good 2006 deficit of $250 billion, the current ratio comes in below the forty-year average at 2%. The equivalent analysis for the American citizen is the debt service, or interest payments, to annual after tax income relationship. This ratio is 13.75%, and climbing! Unlike the Federal trend, American consumers are getting worse, not better.

Looking at the Total Debt vs. Total Assets financial picture one can see that the Federal Government has a ratio of 9%, $8.5 trillion vs. $94.1 trillion, whereas the average American, once again, fails by comparison, doubling this rate of indebtedness with 18.5%. Even as home values have appreciated substantially over the years, the leveraged equity, incurred by most homeowners, has increased by even more!

Current unemployment numbers are around 4%, which is the lowest in years, and a rate that most economists view as “full employment.” Inflation is practically non-existent at 1.3%. Tax revenues are coming into the Treasury at the highest rates ever even with the Bush tax cuts, proving again the Reagan “supply-side” model of lower rates spurring greater growth and higher tax receipts. The stock market has been on a historic rally and we remain the envy of the world for our tremendous economic performance! Yet, the politics of divisiveness maintained dire economic predictions during the campaign of ’06.

So, what’s all the fuss? As Americans we always demand more, but we should be mindful of what the the philosopher once said, “don’t let the perfect become the enemy of the good.” We should never allow our interest in improving our situation overwhelm our capacity to continue along the path of “good”results.

During WWII our National Debt increased seven-fold. This was the 121% era of Debt to GDP. We should never forget how we got out of that situation. We grew out of it. Economic growth subsequently dwarfed the amount of all additional new debt. Since 1946, inflation-adjusted debt has grown 84%, but the economy has grown by 429%- more than five times as much! It is a “dynamic” and not “static”economic situation. We should never fall prey to those who suggest immediate tax hikes to “fix” the debt/deficit problem. Such foolish policies would serve only to cripple economic development, thus impeding our ability to grow and expand out of it.

Does this mean we have no financial worries at the Federal level? Of course not. The area of most concern is Social Security and Medicare. Together these two programs amount to an unfunded liability of $33.2 trillion- 8 times larger than our current total National Debt! Without reform, we are left with only two options: (1) raise taxes to levels unseen in American history, or (2) increase the debt ratio to levels comparable to those experienced during WWII. Either way, Americans could expect substantially higher taxes, lower incomes and more poverty.

America, with all of her talent, resources and freedom to accomplish such remarkable things as “Black Friday,” all in the cause of Playstation 3, surely can find the wherewithal to produce a practical answer to solving the fiscal needs facing the strongest Economic Nation on Earth!

Since the Tax and Debt options, (ie. paying options), are unrealistic, logic tells me, it’s the Liabilities themselves that are the most unrealistic of all! Today’s unfunded liabilities remain- tomorrow’s tax or debt burden! (send comments to WFC83197@aol.com)