Joint Economic Committee


Senator Dan Coats (IN)

In addition to presiding over a stagnant economy (Part 1) featuring subdued employment (Part 2), the Obama Administration has been fiscally reckless over the last eight years.  It has set records for debt accumulation that rank alongside administrations during the Civil War and World War II, but without the excuse of high levels of war spending that existed during those conflicts.  The Obama Administration’s unnecessary fiscal stimulus package only managed to stimulate unsustainable levels of debt.  The Congressional Budget Office (CBO) currently projects a dangerous debt-to-GDP ratio of 141 percent in 2046.

A. Record Spending and Debt

Figure 1 indicates the speed of debt accumulation by measuring the average annual change in publicly held federal debt as a percentage of GDP during each administration since 1897.[1]  For example, at the beginning of the Hoover Administration (1929-1933), the debt-to-GDP ratio was 17.0 percent.  Near its approximate end in 1932, it increased 17.5 percentage points to 34.5 percent.  This is an average annual change of 4.4 percentage points.

The Franklin Delano Roosevelt (FDR) Administration can be divided into two sets of eight years.  The first, 1933-1941, was part of the Great Depression, during which the debt-to-GDP ratio increased from 34.5 percent to 42.7 percent—a cumulative increase of 8.2 percentage points, or an average annual 1.0 percentage point increase.  Interestingly, by this metric the Hoover Administration—frequently criticized for being passive during the Great Depression—was over four times more aggressive than the FDR Administration.

Using CBO data[2] extending back to 1790, the record for debt-to-GDP increases on an annual basis goes to the Lincoln Administration (1861-1865), which realized an average increase of 5.9 percentage points per year as a result of the Civil War.  In second place is the FDR/Truman[3] Administration (1941-1949), which registered an average increase of 4.7 percentage points per year as a result of World War II expenditures.  Tied for second place is the Obama Administration (2009-2017), which is set to average a 4.7 percentage point increase in the debt-to-GDP ratio on a per-year basis.[4]

During President Obama’s tenure, the debt-to-GDP ratio began at 39.3 percent in 2008.  CBO estimates 2016 will conclude with a 76.6 percent ratio.  This increase of 37.3 percentage points is the largest in American history going all the way back to 1790.  It edged out the prior record set by the FDR/Truman (1941-1949) Administration’s cumulative increase of 37.2 percentage points.  However, unlike that era’s record, the Obama Administration’s debt explosion cannot be attributed to massive war spending.  In the final three years of World War II, spending on national defense exceeded 36 percent of GDP.  In contrast, defense spending never reached even 5 percent of GDP during the Obama Administration.[5]

B. Government Stimulus Only Stimulates Deficits and Debt

The record high for the federal deficit relative to GDP occurred during World War II when it reached 26.9 percent in 1943.  As Figure 2 shows, the second-highest record was set under the Obama Administration when it reached 9.3 percent in 2009, the year of the President’s “stimulus” legislation, the American Recovery and Reinvestment Act.  In contrast, the average deficit-to-GDP ratio over the past 50 years was just 2.8 percent.[6]

Notably, the 2009 deficit-to-GDP ratio was substantially higher than it was during the Great Depression, but we failed to experience the recovery promised by the Obama Administration.  This reinforces the notion that Keynesian-style government spending initiatives simply don’t work.  Sustainable economic growth is not created by government spending but through an unburdened private sector.  For this reason fewer regulations and lower tax rates stimulate growth in the short run and drive it in the long-run.

As demonstrated in section A of Part 1 and section B of Part 2, blaming the current recovery’s sluggishness on “such a deep recession,” or “changes in demographics with an aging population” doesn’t add up.  Additionally, the argument that the “stimulus package was too small” just doesn’t cut it, because if it was needed to save the economy, it follows that eliminating it should have led to an economic collapse.

As the 2009 Obama stimulus package was winding down, Keynesian economists, such as Paul Krugman, warned a catastrophe would be imminent if the deficit were reduced, i.e., if “austerity” measures were taken.

The blue line in Figure 3 shows the deficit-to-GDP ratio.  A falling blue line indicates a shrinking deficit relative to the size of the economy.  Following a substantial deficit reduction after the Republican takeover of the House of Representatives, the economy did not collapse into depression, as the red line (real GDP growth) shows.

C. Long-Run Implications of Reckless Spending

During the Obama Administration, the publicly held debt-to-GDP ratio (orange line in Figure 4) skyrocketed from 39 percent in 2008 to a projected 76.6 percent by the end of 2016.  Also included is gross federal debt-to-GDP (blue line in Figure 4).  This is the sum of federal debt held by the public (debt owed to American and foreign investors) and intragovernmental holdings (debt the government owes to itself) in proportion to GDP.  Intragovernmental debt includes money the government has borrowed from its own trust funds, including the Social Security Trust Fund, and is obligated to pay back.  However, this is generally ignored by traditional debt-to-GDP ratios, which obscures the whole fiscal picture.

Ignoring intragovernmental debt is dangerous because it downplays the risk to both the government and the beneficiaries of its trust funds.  As an analogy, imagine you agree to a friend’s request to help him save for his retirement by putting his money in your safe.  Meanwhile, every time your friend makes a deposit, you take the money and use it to buy TVs, steak dinners, etc. and replace the money with IOUs.  When your friend’s retirement day arrives you have deposited $100,000 of IOUs, but unfortunately your friend, who thought he had $100,000 with you, now owns worthless scraps of paper and has to cancel his retirement plans.  At the same time, you have no money to pay him back because you have spent it all and owe funds to other creditors as well.  Thus, government may “owe to itself,” but in reality, those government funds are promised to actual people.

This is how Social Security works.  The government takes part of American workers’ paychecks, promising to hold it until they retire.  Meanwhile, it spends the money, and replaces it with IOUs.  While federal government bonds in the trust funds are not “worthless scraps of paper,” they eventually will be if we fail to fix our spending problem.

What is also alarming is that the Obama Administration has made no effort to resolve the imminent insolvency of Social Security and Medicare.  CBO projects a dire long-run situation, as shown in Figure 5,[7] which shows the percentage of federal debt held by the public relative to GDP.  By 2046, this will reach 141 percent, assuming that the government will indeed pay back its trust funds as they grow increasingly insolvent.  In perspective, paying off this level of debt would require a tax rate of 165 percent on the total income of all households and businesses for one year.[8]


At the beginning of the Obama Administration, the nonpartisan CBO warned that, “Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run.”  However, the Administration favored fiscal recklessness over working with Congress to take action.  Consequently, our nation is left in a more precarious fiscal and economic position.  In its latest Budget and Economic Outlook, CBO warned of the following consequences:

  • Federal spending on interest payments would increase substantially as a result of increases in interest rates, such as those projected to occur over the next few years.
  • Because federal borrowing reduces total saving in the economy, the nation’s capital stock would ultimately be smaller, and productivity and total wages would be lower.
  • Lawmakers would have less flexibility to use tax and spending policies to respond to unexpected challenges.
  • The likelihood of a fiscal crisis in the United States would increase. There would be a greater risk that investors would become unwilling to finance the government’s borrowing needs unless they were compensated with very high interest rates; if that happened, interest rates on federal debt would rise suddenly and sharply.[9]

To help ensure that we achieve fiscal stability, the key drivers of our spending—mandatory programs—must be reformed.  Within 10 years, spending on mandatory programs and interest on our debt will consume over 96 percent of all federal revenues.  This means other programs, such as national defense and health research, and disaster assistance, will be financed with borrowed dollars, if they can be funded at all.  To curtail the costs of mandatory programs, like Social Security and Medicare, Senator Coats introduced legislation to improve and streamline mandatory spending programs and achieve a balanced budget.  While a step in the direction of achieving fiscal stability, it must be accompanied by commonsense solutions to modernize our regulatory and tax policies to ensure America’s sluggish recovery does not become its ‘New Normal.’

[1] Calculations graphed here are available all the way back to 1790.  Please see the CBO dataset, “Historical Data on Federal Debt Held by the Public,” August 2010.  Please refer to the next endnote for methodology used to estimate the data excluded from the former source.

[2] The data for 1790 to 1965 is the debt-to-GDP ratio in calendar year terms.  It comes from the August 2010 CBO paper, “Historical Data on Federal Debt Held by the Public.”  The data from 1966 to 2015 is from the CBO dataset, “Historical Budget Data” published March 2016.  This data measures the fiscal year.  So, for example, the 1966 debt-to-GDP ratio consists of the time between October 1, 1965 and September 30, 1966.  The latter was retrieved from CBO’s Budget and Economic Data page.  The data for 2016 is a projected debt-to-GDP ratio for the fiscal year running between October 1, 2015 and September 30, 2016.  This was retrieved from CBO’s “Summary Table 1” in its “10-Year Budget Projects” dataset published August 2016.  The latter comes from CBO’s Budget and Economic Data page. 

[3] Truman’s name is included here since he became President very early (April 1945) in Roosevelt’s final term (1945-1949).

[4] Breaking this into four-year terms: First place goes to Roosevelt (1941-1944) at 13.2 percent, second, to Obama (2009-2013) at 7.8 percent.  Third is the Wilson Administration (1917-1921) at 6.0 percent.

[5] For these statistics, refer to Table 3.1 of the Office of Management and Budget’s (OMB) Historical Tables, Fiscal Year 2017.

[6] See p. 10 of the CBO’s “An Update to the Budget and Economic Outlook 2016 to 2016,” August 2016.

[7] For more information on these issues please refer to the JEC’s paper, “Debunking the Dangerous Claims of Debt Deniers.”

[8] This was calculated by finding the inverse of the average ratio of national income to GDP between 1980 and 2015, then multiplying it by 141.

[9] “The Long Term Budget Outlook,” Congressional Budget Office, June 2009, p. XI; see also: “An Update to the Budget and Economic Outlook, 2016 to 2026,” Congressional Budget Office, August 2016.