The U.S. government historically went into debt suddenly to fight wars and then gradually repaid the debt, entirely or in large part, in the postwar period. This pattern held until the Great Depression and World War II, when the government went massively into debt, but did not pay off much of that debt afterward. However, it did not add much to the debt between 1946 and the early 1980s, so for more than thirty years, the real debt hovered in the neighborhood of $2 trillion (dollars of 2010 purchasing power).

As the charts show, however, a new debt regime became established at that time. Afterward, real debt increased relentlessly except during Clinton’s second term. As soon as the George W. Bush administration began to steer the ship of state, the debt accelerated. Under Obama, it has exploded. The only previous such explosion occurred when the U.S. government undertook to engage in World War II.

For more than three decades after the end of World War II, the U.S. economy grew faster than the outstanding debt, and therefore the ratio of debt to GDP fell. During the Reagan and George H. W. Bush administrations, this pattern was broken. Under Obama, it has been smashed with a vengeance, although, to be fair, one ought to note that the George W. Bush administration had got the smashing well under way before Obama took office.

Federal debt held by the public now stands at nearly $10 trillion, and it will soon fly past this marker. As the government continues to run budget deficits of $1.5 trillion or more, the debt will mount rapidly. Although the government projects a turnaround in this fiscal profligacy, its actions so far belie its promises. Nevertheless, the bond market may eventually rein in the Treasury, as investors lose confidence in the government’s ability to meet its contracted obligations.

The foregoing discussion relates to the official debt. The government has also assumed effective possession and control of Fannie Mae and Freddie Mac, which means that it has also assumed responsibility for those institutions’ debts, which amounted to approximately $5 trillion at the time they were taken over. How much of this indebtedness will end up as a burden to U.S. taxpayers depends on Fannie and Freddie’s  future net earnings, which in turn depend on future events in the housing market and the overall economy.

I hope that you are as tired as I am of hearing politicians trot out the term “investment” to justify spending the taxpayers’ money on such things as high-speed rail, “green” energy alternatives to fossil fuels, innovative R&D projects and highways, more widespread Internet access and other so-called infrastructure.

The public sector does not invest in any meaningful sense. The act of investing implies careful consideration of expected streams of future benefits produced by current outlays, not only for the project under consideration, but also weighing anticipated net returns against the next best alternative uses of funds, with suitable adjustments for relative risk.

Because government can only spend the money it has borrowed from or taxed away from the private sector and, moreover, has no bottom line for measuring the economic soundness of the projects it undertakes, politicians have little or no incentive to allocate the resources under their control cost-effectively. Investment decisions by the public sector are primarily shaped by politicians’ and bureaucrats’ goals of being reelected or reappointed to office.

Following the imperatives of the vote motive, public spending initiatives, whether characterized as investments or not, are designed to benefit important electoral constituencies – labor unions, public school teachers, groups that support forcing Americans to pursue healthy lifestyles, and so on. Economic benefit-cost analyses play no role in these decisions. And, for obvious reasons, such investments rarely, if ever, are evaluated after the fact to determine whether they actually fulfilled their ostensible purposes of “creating jobs” and spurring economic development.

A public proposal to spend money on high-speed rail is no different from one to expand eligibility for Medicare or Medicaid. In all such cases, special-interest groups benefit at the expense of the taxpaying public.

The private sector invests knowing full well that the costs and benefits of its actions will fall on the shoulders of business owners. In the public sector, those costs and benefits will be borne by others. Just as the words “government” and “efficiency” should never appear in the same sentence, so is true of “government” and “investment”.

For handy reference, three of my favorite sites:

http://www.usdebtclock.org/ (current data)

http://www.usgovernmentspending.com/  (historical comparison are more shocking). I blogged about this site here.

And, of course,

http://www.mygovcost.org/ (Government Cost Calculator)

Last Summer, as General Motors was preparing to make an initial public offering of stock, President Obama said the federal government had made an investment in GM, and that the taxpayers would get all their money back from this investment.  I was skeptical, because for taxpayers to recover all their money meant that GM would have to be valued at about $80 billion, which seemed unrealistic to me.

GM just reported a 2010 profit of $4.7 billion, so their recovery after their government bailout is on track.  The day after reporting that profit, GM stock is selling for $34 a share, making the market capitalization of GM about $51 billion.

GM’s stock would have to rise to more than $50 a share for the taxpayers to recover President Obama’s “investment” in GM.  That’s more than a 50% increase over its current price.

I doubt that anybody — including President Obama — really thought that the government could get its money back from the GM bailout.  But the president did say that last year, prior to GM’s initial public offering.  Now that GM’s stock is on the market, and GM has reported a very profitable year, I don’t think it is a bad thing to point out that despite good news for GM, the deal did not turn out well for taxpayers.  We now have facts to evaluate the president’s claim, and what the president said turned out not to be true.

To answer the question I’ve posed, consider the following table from the National Income and Product Accounts, accessed yesterday at the Bureau of Economic Analysis website.

According to the National Bureau of Economic Research, the recession began in December 2007, so we can take 2007 as the last pre-recession year for purposes of annual comparison.

Between 2007 and 2010, real GDP fell slightly (2.6 percent) in 2009, then recovered fully in 2010, reaching a new high (but only slightly above the figure for 2007, too small an increase to take seriously).

After BP’s oil spill in the Gulf of Mexico, President Obama demanded that BP turn over $20 billion to the federal government, to be paid as compensation to those who were harmed by the spill.  At the time critics lashed out at Obama for his strong-arm tactics, extorting that money from BP, but as I blogged at the time, the president was actually doing BP a favor.

Note that while others complained about the president’s actions, BP quietly went along with no complaints.

Because of their negligence, BP was going to be on the hook for a substantial liability in that case, and they would either have to go through the process of settling with claimants, or going to court to determine their liability for damages.  That would have been BP’s legal responsibility, but President Obama let them off the hook, and made it the responsibility of his administration to compensate those who were harmed.  People can still sure BP, but because of Obama’s claims process, lawsuits will be greatly reduced.

Great Leader, who art in Washington,

Hallowed be thy name.

Thy empire come,

thy will be done,

on earth as it is in the Oval Office.

Give us this day our daily dole.

And forgive us our late tax filings,

as we forgive the IRS for refunding our overpayments without interest.

And lead us not into temptation,

but deliver us from the DEA.

For thine is the federal prison system, the FBI, the military, the CIA, the regulatory agencies, the Surveillance State, and all the rest of the tyrannical apparatus under which we groan, not to mention

the power and the glory,

for ever and ever (unless justice is done sooner).

Amen.

On this President’s Day weekend, let us commemorate the record of the best president in U.S. history: John Tyler.

A random poll of Americans would draw mostly puzzled looks at the name, but according to Independent Institute Senior Fellow Ivan Eland, in his 2009 ranking of the presidents, Recarving Rushmore, this 10th U.S. president has the strongest record upholding Peace, Prosperity, and Liberty of any of the 43 presidents to date.

On the prosperity front, Tyler vetoed both the attempt to revive the national bank, and a bill to raise tariffs. His efforts for peace included ending “the longest and bloodiest Indian war in U.S. history,” and cutting the number of troops in the U.S. Army by 33%. He also chose not to respond militarily to both an internal rebellion in Rhode Island, and to a border dispute with Canada, both of which were instead resolved peacefully.

But what of those presidents whose birthdays morphed in “Presidents Day”—Washington and Lincoln—or these two plus one usually ranked as “Greats:” Washington, Lincoln, and FDR?

If any one thing estimated in the Commerce Department’s National Income and Product Accounts may be described as the engine of economic growth, private domestic business net investment is that thing. This variable has such tremendous importance because, if accurately gauged, it tells us better than any other measure how many resources are being devoted to building up the private business capital stock and improving it by innovation. An economy that has anemic private business net investment almost certainly will falter soon, if it is not doing so already.

Notice that every aspect of this awkwardly named variable is critical.

• First, it has to do with private investment, not so-called government investment. The latter, which looms fairly large in the official accounts, ought never to have been labeled as investment, because it comes about not as a result of wealth-seeking motives and rational economic calculation, but as a result of political motives, calculations, and actions that often clash with the creation of real wealth, rather than contributing to it.

• Second, we are looking here at business investment, excluding what the Bureau of Economic Analysis calls private “household and institutions” investment, which has somewhat murky underlying objectives, determinants, and consequences.

• Third, we are examining net, rather than gross, investment. The latter includes a large element of expenditure aimed merely at compensating for the wear and tear and obsolescence of the existing stock of private business capital. For example, even at the most recent peak for gross private domestic business investment, in the third quarter of 2007, it was running at $1,661 billion (annual rate), whereas net private domestic business investment was only $463 billion (annual rate), or about 28 percent of the total. (The investment data cited in this article are taken from Table 5.1, Saving and Investment by Sector, in the National Income and Product Accounts, accessed 02/16/11.)

It is obviously important that businesses compensate for ongoing depreciation of their existing stock of capital goods, which includes structures, tools and equipment, software, and inventories. But unless firms do more than make up for depreciation, they do not expand their productive capacity except to the extent that they can embed improved technology in their replacements for worn-out or obsolete capital goods. In general, economic growth requires net investment, and more rapid economic growth requires a greater rate of net investment.

During any age of unrest, left-liberals and right-conservatives (and even some classical liberals) will reveal the worst side of their respective political positions. In short, the visceral kicks in and the brain flatlines. While I could write about the conservative response to Middle Eastern unrest, they seem quite divided. Not so the left-liberals who are in full “brain-dead” mode (to grab playwright David Mamet’s quote about “brain-dead liberalism”).

In the past month, I have listened to the Left’s rhetorical giddiness about “Revolution!” As the father of teen and pre-teen daughters, I can assure you that this brain-dead response is reminiscent of young girls dreaming about Justin Bieber.

Here are the questions I ask of any revolution in the Middle East, along with the usual mindless liberal answers:

1. Will there be more or less religious freedom?

Liberal #1: “I don’t really care about religion.”

Liberal #2: “What are Jews and Christians doing over there?”

Liberal #3: “It’s all our fault anyway” or “some people have different values” (that is a catch-all brain dead response to ANY question).

2. Will there be more economic freedom?

Liberal #1: “Economic freedom is code for neoliberal exploitation of those lands”

Liberal #2: “They will seek a Middle Way between capitalism and socialism”

Liberal #3: “Who cares about the economy? Let those people be free!!!!” (The incapacity to care about economics underlies much of the stupidity that passes for analysis in daily punditry).

3. Will democracy last or will something disagreeable replace it?

Liberal #1: “It can’t get any worse”

Liberal #2: “What is the meaning of ‘disagreeable'”?

Liberal #3: “Democracy is a basic universal right. Ask the U.N.”

4. Will women be freer?

Liberal #1: “Many women are in the streets so the answer must be ‘yes.'”

Liberal #2: “We must respect other cultures” (ignores the question)

Funny Liberal #3: “What’s wrong with having four women as servant-slaves?”

5. Will the revolution be in the best interests of America?

Liberal #1, 2, 3: Who cares?