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A Personal View on the Financial Crisis

October 10, 2008 on 12:41 pm | In Politics |

First off, I’m not an economist. I’m an astrophysicist and a teacher, and that’s what I’m professionally trained to do. Really, it’s the only thing I’m professionally qualified to talk about. But the way we run our economy is too important to not talk about. I remember in 1989 we set up a “debt clock” in New York City, to show the nation’s $2.7 trillion debt. The debt clock just passed a milestone; it ran out of digits.

How did things get this far out of hand? Seriously. I manage my own finances pretty well; sometimes I accrue a little debt, sometimes I’ve got a little bit of savings, but mostly I live within my means. Sometimes dire circumstances arise and you have to borrow. And when times are prosperous, it’s easier to save. There are economists who argue that more debt is better, but their proof is the success of the stock market. After all, Kenneth Fisher says this:

The ultimate proof is the stock market. As we mentioned earlier, the data from my November article showed that budget deficits lead to good stock returns and surpluses lead to bad ones…

We shouldn’t reduce debt. In fact, we need more debt–even from stupid borrowers. The right level of debt would be when we’ve borrowed enough to drive interest rates up, the return down, or a combination of both. Then, we’ll be optimal. But we’re far from that. The U.S. has $55 trillion in debt of all types–mortgages, car loans, local and federal, according to the Federal Reserve Flow of Funds Accounts. I would argue that tripling all these types of debt would probably get us close to profit maximization and increase wealth for society. Imagine what we could invest in!

Now, I’m not an economist. But if what he’s saying is true, then when I look at the stock market over the last 10 years:

there should be a correlation between the market and the amount of debt that we’ve gone into over that time. But while the stock market has gone up and down, and is now at the same place it was 10 years ago, the national debt has skyrocketed:

This graph clearly shows that the national debt has nearly doubled in the last decade, while the stock market continues to tank. Now, there are a lot of complicated things going on in the stock market, and I don’t pretend to understand that system. But I do understand the notion that we are continuing to spend a lot more than we’re making. Even though our GDP is going up:

Our debt is going up faster. If I look at debt as a fraction of GDP, I find that by the end of the year, it will pass 70%. That’s not the end of the world, but it’s a lot of money:

What’s odd about this is that democrats, you know, the “tax-and-spend” democrats, seem to incur less debt than the republicans. Maybe this isn’t fair. So I did a statistical analysis here, and analyzed the presidents since the end of World War II. Here’s what I found:

Since 1946, Democratic presidents increased the national debt an average of 3.2% per year; Republican presidents increased the debt by 9.2% per year. Republican Presidents out-borrowed and outspent Democratic presidents by a three to one ratio. What’s more, is if I analyze the economic trends since 1981, Reagan, Bush I, and Bush II’s economies show exponential growth of debt. Clinton’s? The growth asymptotes to zero.

Someone else did a year-by-year breakdown of debt increases, and here’s what they came up with:

How did the debt get so out of hand? I went to two sources to try to find out. Although the lack of controls on Wall Street (financial deregulation) and the war in Iraq (many hundreds of billions of dollars already) played huge roles, the biggest thing that’s happened during the last eight years to increase the national debt is the Bush tax cuts on the wealthy. And we’re not taxing enough or reducing spending enough to make up for it. We never have, not since 1961.

What would I like to see? Really? The government to run itself as responsibly as I run my own life. Take care of itself and its own economics. Balance its own budget. To be sustainable, in a long-term fashion. I don’t know that a democratic administration will do that, but I know a McCain administration won’t. You can’t make these tax cuts permanent and still pay for everything we have going on. And at the very least, national healthcare (medicare/medicaid) needs a complete overhaul, because as the population gets older and lives longer, these costs are only going to go up.

Do you miss the physics and astronomy? I do. Help me out and ask a question; I’ll do my best to give out a good, informative, and interesting answer! And if you need to get your space fix for the week, check out the Carnival of Space, where astronomy writers from around the world gather to recount their most interesting posts of the week!


17 Comments »

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  1. Who would miss astrophysics when you can so succinctly explain and examine this problem?
    Well put Professor Seigel!!

    Comment by dave — October 10, 2008 #

  2. Nice analysis. I’m confused by one thing. I thought Clinton balanced the budget and left us with a budget surplus. He’s famous for saying how Bush I gave him a 400 billion deficit, and he left office with a 500 billion surplus. However, the plots you’re showing merely suggest he halted debt growth.

    Comment by Brian — October 10, 2008 #

  3. Brian, from what I can tell, the “balanced budget” was supposed to happen over the 2000-2001 fiscal year. When Bush II took office, that went out the window pretty quickly, as spending went up and taxes went down. Remember, we were in a recession, and so something needed to give there, too. The “budget” is a projection for the next fiscal year, it doesn’t necessarily accurately reflect revenues vs. outlays.

    Comment by ethan — October 10, 2008 #

  4. Well, if the debt doesn’t rise under democrats, they obviously must be doing something to get in money. Could that be, Iono, taxing?

    So dems might be tax-and-spend, but repubs must then be spend-and-spend.

    I know what I’d prefer.

    May GUT have mercy on us all.

    Comment by Sili — October 11, 2008 #

  5. Excellent piece—- very clearly written, loved it. Period.

    Comment by mOt — October 13, 2008 #

  6. Are you sure your not an economist? :)

    Comment by Steven — October 13, 2008 #

  7. Steven, Not an economist, just an opinionated scientist. ;-) Sili, of course taxing and spending is how the system works, but any alternative just seems ridiculous. Can you imagine what my creditors would do to me if I increased my spending and borrowing and simultaneously stopped earning money (or just earned a lot less) at my job?

    Comment by ethan — October 13, 2008 #

  8. Also, Brian, I found (from looking at conservative pundit Joe Scarborough’s information) that Clinton entered with a $400B deficit, left with a $150B surplus planned for the 2001 FY, and Bush immediately swung that $300B the other way, into a $150B deficit. The deficit for 2008, before the year is out, will undoubtedly set a new record, and may even approach one trillion dollars! What would Dr. Evil say about that??

    Comment by ethan — October 13, 2008 #

  9. Joe Scarborough is conservative, but he’s also interestingly an Obama supporter.

    Comment by Brian — October 13, 2008 #

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