Which party is the most to blame for the national debt?

Two things in post 39 that gave me a hard time.

One is the use of budget projections that assume no change in social security or other entitlements (one way or the other this is going to change), and that leave out any concurrent creation of wealth (re the graph and explanation in post 24).

They are not "predictions", they are "projections" under current law. I likewise have little doubt that the rising public debt will force current law to change. Those changes will include entitlement benefits and/or tax policy. The projections do include revenue from any currently scheduled taxes on wealth. However, it is true that the government may be forced to tax that wealth more heavily. In any event, the purpose of the projections is to help us prepare for the likely changes that will have to occur in current law.

The other is the idea of a "peace dividend to balance the budget". Sounds like my ex-wife talking "--we just finished the stereo payments so I went out and charged a new tv set and the payments will be the same so the tv won't cost us anything!!!". There's no such thing as a "peace dividend", it's just more taxes and the only difference is what the taxes are to be spent on.

In fact, there was a HUGE peace dividend at the end of the Second World War. The following table shows the National Defense Outlays and Gross Federal Deficit during the Second World War and during the past decade:

   ROLE OF NATIONAL DEFENSE OUTLAYS IN GROSS FEDERAL DEFICIT
                       (percent of GDP)                                            
                                                         without
      National    Excess     Gross     Gross   without    Excess
       Defense   Defense   Federal   Federal   Defense   Defense
Year   Outlays  Outlays*      Debt   Deficit   Outlays   Outlays
----  --------  --------  --------  --------  --------  --------
1941       5.6       0.6      50.4      -6.0      -0.4      -5.4
1942      17.8      12.8      54.9     -15.0       2.8      -2.2
1943      37.0      32.0      79.1     -35.2       1.8      -3.2
1944      37.8      32.8      97.6     -29.4       8.4       3.4
1945      37.5      32.5     117.5     -25.3      12.2       7.2
1946      19.2      14.2     121.7      -4.9      14.3       9.3
1947       5.5       0.5     110.3       5.9      11.4       6.4
1948       3.6      -1.4      98.4       2.0       5.6       0.6
1949       4.9      -0.1      93.2      -0.2       4.7      -0.3
1950       5.0       0.0      94.1      -1.6       3.4      -1.6

1997       3.3       0.3      65.6      -2.3       1.0      -2.0
1998       3.1       0.1      63.5      -1.3       1.8      -1.2
1999       3.0       0.0      61.4      -1.4       1.6      -1.4
2000       3.0       0.0      58.0      -0.2       2.8      -0.2
2001       3.0       0.0      57.4      -1.4       1.6      -1.4
2002       3.4       0.4      59.7      -4.1      -0.7      -3.7
2003       3.7       0.7      62.5      -5.2      -1.5      -4.5
2004       4.0       1.0      63.9      -5.2      -1.2      -4.2
2005       4.0       1.0      64.4      -4.5      -0.5      -3.5
2006       4.0       1.0      64.7      -4.2      -0.2      -3.2

* above 5.0% of GDP from 1941-50 and above 3.0% of GDP from 1997-2006
Note: Gross Federal Deficit is the annual change in the Gross Federal Debt
Source: Budget of the United States Government, FY 2008, Historical Tables,
        tables 1.2, 3.1, and 7.1

As can be seen, our approximate yearly outlays on National Defense during the Second World War was a stunning 37 percent of GDP! In contrast, our current yearly outlays are about 4 percent of GDP. Estimating normal military outlays to have been about 5% of GDP during the forties, we began saving about 32 percent of GDP per year once the war ended. That's why the debt as a percent of GDP began to plummet after the war.

Now, however, we would only get a peace dividend of perhaps 1 percent of GDP if the Iraqi and Afghanistan wars were to end. The problem is that we did not have a structural deficit at the end of the Second World War but now we do. Add to that the fact that the Boomers are about to begin retiring and it's as likely as not that the long-term projections shown in post #39 are overly optimistic. Major changes will likely be required to entitlements, other spending, AND taxes. The less we prepare, the larger those changes will likely be.

peace' div"idend

money cut by a government from its defense budget as a result of the cessation of hostilities with other countries.

It's a new term. It shows up in the 1997 dictionary but not in my older 1983 unabridged.

Back during the second world war, all the resources of the American republic were mobilized; a private economy became a wartime economy and virtually the entire population joined up in one form or another. When victory was achieved, everyone accepted as obvious that the fighting be stopped, the economy reverted, and millions of former service personal become members of a huge private labor force. Taxes that were no longer needed were simply no longer raised.

The idea of a "peace dividend" didn't exist because nobody back then considered the wartime economy and its human capital as being owned and allocated by the State.

By the time the cold war ended 45 years later however, this Statist attitude was unfortunately entrenched in the Democrat controlled congress. All American resources --public or private-- were assumed to be at the legislature's disposal. That's why when taxes --originally justified by the need to defeat Communism-- were no longer necessary, the Democrats continued the levy so that the funds could be disbursed elsewhere as the lawmakers saw fit.

That's when the term "peace dividend" was coined. Years later when the cold war faded into the past, this same Statist tax mode continued with the phrase "tax-cuts must be paid for".

That's when the term "peace dividend" was coined. Years later when the cold war faded into the past, this same Statist tax mode continued with the phrase "tax-cuts must be paid for".

We seem to be getting way off topic. In post #39, I used the term "peace dividend" as shorthand for the huge war expenditures of 30-plus percent of GDP that went away when the Second World War ended. You seem to believe that this is a code word used only by "Statists". In any event, I did not mean to use it as such. It was in response to the following statement that you made in post #14:

Our grandparents weren't bad people when they went into debt to defeat Hitler; they immediately paid it back to prewar levels. Same for our parents with finishing of the cold war. I know all the global-warmer types need their morning crisis to start their day, but reality is that the debt/%gdp is going down.

My whole point is that our situation is very different form that of our grandparents. Their deficits were chiefly due to the Second World War and, as soon as that war ended, so did most of the deficits. However, the Iraqi and Afghanistan war could end tommorrow and we would still be in deficit. In any case, I'll address again your contention that the debt as a percent of GDP is declining. Following is a graph of the federal debt:

The actual numbers and sources are at http://home.att.net/~rdavis2/debt08.html. As can be seen, the gross federal debt (the red line) is still going up as a percent of GDP and is close to the peak that it reached during the mid-nineties. Hence, we have already nearly undone any paydown from the end of the cold war. Furthermore, this is occurring on the eve of the Boomer retirement.

Your statement is true only if you look at the debt held by the public (the blue line) which ignores the debt owed to Social Security and the other trust funds. This makes sense for determining our long-term financial condtion only if you believe that none of this money will have to be repaid, that the trust funds are like rich uncles that will let the debt slide. This is obviously not the case with Social Security, which holds over half of debt or the Civil service retirement and disability fund which holds another 17 percent. Hence, the gross federal debt is the debt that we shold be looking at.

"...debt/%gdp is going down..." " only if you look at the debt held by the public (the blue line) which ignores the debt owed to Social Security and the other trust funds..."

Debt is what one entity owes to another, and that's what public debt is -it's honest and clear.

With social security and other trust funds, we have our government to borrow our money from itself to be able to pay us later with deflated money but including interest but that will be taxed to finance trust fund payments to us that also will be taxed and paid with deflated money, but it's never going to happen because the entire system will be overhauled long before the bonds mature.. That's not clear. It's murky enough to hide all kinds of nonsense.

It's like budget projections. Just because the 2007 % gdp/pub.debt was projected by really smart people to come out at 36.9, doesn't make it right. As of Oct. 1, (end of fy07) the gdp is $13.9T and public debt is $5.06T. That comes out to 36.4%.

Debt is what one entity owes to another, and that's what public debt is -it's honest and clear.

I don't consider it honest and clear to increase the FICA tax to build up a trust fund, borrow that surplus to pay for general government, and then pretend that the money needs never be repaid. Hence, I suggest that we just agree to disagree on this. However, this does remind me of a question in case you or anyone else out there knows the answer.

The following table shows the debt held by the trust funds according to the most recent budget:

            DEBT HELD BY GOVERNMENT ACCOUNTS (billions of dollars)

                                    Investment or disinvestment  Holdings
                                   -----------------------------   end of
                                     2006   % of    2007    2008     2008   % of
Description                        actual  total    est.    est.     est.  total
---------------------------------- ------  -----  ------  ------  -------  -----
Old-age and survivors trust fund..  177.0   57.2   180.2   203.6   2176.9   51.5
Civil service retirement & disabil   29.2    9.4     9.3    30.1    729.4   17.2
Hospital insurance trust fund.....   24.9    8.1    11.9     3.3    317.4    7.5
Military retirement trust fund....    4.5    1.5    27.1     7.6    216.5    5.1
Disability insurance trust fund...    8.9    2.9     4.2     5.7    212.0    5.0
Medicare-eligible retiree health..   19.9    6.4    23.5    24.1    120.3    2.8
Unemployment trust fund...........   11.4    3.7    12.8    12.0     91.0    2.2
Federal Deposit Insurance Corp....    1.1    0.3     1.8     2.9     53.9    1.3
Employees life ins & health benfts    4.1    1.3     3.0     2.4     51.4    1.2
Supplementary medical insurance...   15.9    5.1     8.8     6.3     48.2    1.1
Postal Service retiree health fund    0.0    0.0    31.4     6.9     38.2    0.9
Housing and Urban Development.....   -0.2   -0.1    -0.3     0.6     30.7    0.7
Nuclear waste disposal fund.......    1.0    0.3     0.1     0.9     19.7    0.5
Highway and Airport trust funds...    0.6    0.2     1.5    -1.8     18.6    0.4
Exchange stabilization fund.......    0.5    0.2     0.3     0.4     16.4    0.4
Foreign service retirement & disab    0.5    0.2    -0.5     0.1     13.5    0.3
Other government accounts.........   10.1    3.2   -12.8     0.6     75.9    1.8
---------------------------------- ------- -----  ------  ------  -------  -----
Total investment in Federal debt..  309.3  100.0   302.1   305.6   4230.1  100.0

Source: Budget of the United States Government, FY 2008,
        Analytical Perspectives, page 230, table 16-4

As can be seen, the second and fourth largest trust fund holders of U.S. debt are civil service retirement and disability and military retirement. There are annual trustees reports on Social Security and Medicare but I have never seen one for Civil Service and the military. I'm curious as to whether those trust funds are likewise projected to decline during the Boomer retirement. If anyone has ever seen such a report or know whether one exists, please let me know. Thanks.

Since last night it occurred to me that I was making two assumptions that we may not already be sharing.

One is that we both have the same understanding on what happens to trust fund taxes, that they can't get put into some big Scrooge McDuck style money bin, but rather they're posted as bank ledger entries. The consensus is that the banked deposits should earn interest. Interest can only be generated if the money is loaned out and the only permissible borrower of the money is the Government itself. The bottom line is that trust fund money cannot be hoarded and it has to be spent.

The other assumption is that the value of an amount of money changes with the point in time when the money is remitted. A person who loans me money for a year without interest, has given me a gift in kind because money today is worth more than money later. This question of gross debt could be tackled if we first determined the numeric relationship between time an money --for example say, average inflation plus two percent. Once that's worked out we'd then have to deduct both payout taxes and the percentage of probability that the entire program will be transmuted into something else. So we consider gross debt as real debt --ignoring standard monetary realities, or we adjust with simplifying assumptions and accept the uncertainties involved.

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