Uh… Warren… It Was a World War

Like many others, I used to hold 82-year old billionaire Warren Buffett in the highest regard, that is, back when he would talk about such things as our ballooning trade deficit or our bubbly stock market that he didn’t understand and wanted no part of. But, lately, he seems to be showing his age and his latest ramblings about the nation’s debt as recounted in this Marketwatch story are pretty stunning.

“It is not a good thing to have it going up in relation to GDP, that should be stabilized, but the debt itself is not a problem,” the CEO of Berkshire Hathaway said in an interview broadcast Sunday on the CBS “Sunday Morning” news show.

The nation’s debt is “a lower percent of GDP [gross domestic product] than it was when we came out of World War II. You’ve got to think about it in relation to GDP,” added Buffett, a vocal advocate for increased taxes on the nation’s wealthiest, a stance he alluded to in the broadcast.

The chart below from a paper(.pdf) by Daniel Thornton of the St. Louis Fed might be worth studying here.

However you count the debt, it’s way to big by historical measure and, as shown above, it used to only grow during a time of war and then, when hostilities ceased, some of the debt would be paid off. But, that’s not been the case for decades now and to say that, somehow, today’s debt-to-GDP ratio is OK because it’s less than it was after World War II is, well, kind of stupid. My God - it was a world war!

— UPDATE - January 23rd, 5:00 AM —

Here’s a chart from a recent item by Nate Silver that sheds some light on the comparison to World War II. This is spending, not debt, but the debt-to-GDP version of this chart would likely look similar.

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8 Responses to Uh… Warren… It Was a World War

  1. MadMax January 22, 2013 at 7:34 PM #

    My comment below is not directly related to his comment on the topic of US debt. That is a long topic, and for another time and place.

    we have to understand that he also has a big stake in having US stocks doing well. I am not enamored by his statements since the financial crisis. But, it is natural that he would try to protect his investments with his comments. Also, at one point I had heard that he had made a big bet that US stocks would not go down significantly. I respect him as an investing genius. He has not started companies or grown the businesses (at least not directly), and certainly not been an innovator of products and services, and another point to note that Berkshire’s significant business is in Insurance and Re-insurance. We certainly have to respect him for his skills in acquiring boring businesses, but, I doubt any of those businesses really manufacture anything in US. So, I am not sure his business investments have really created jobs. On the other hand technology businesses that he does not invest in (and I am not talking about social networking companies) do create real jobs.

    I look at Berkshire as just another form of financial engineering. We don’t need financial engineers and hedge fund managers, but, more real engineers.

  2. Tom January 22, 2013 at 8:44 PM #

    What was Iraq and Afghanistan? Hint: War of Terror?

  3. Tom January 22, 2013 at 8:52 PM #

    “Iraq war will cost more than World War II
    Iraq war, now winding down with US troop exit by December, has cost more than $800 billion so far. But ongoing medical treatment, replacement vehicles, etc., will push costs to $4 trillion or more.”, This is according to a report in the Christian Science Monitor.

    Go to http://www.costofwar.com and see the nice spinning numbers.

    • Tim January 23, 2013 at 5:17 AM #

      See the update above for a breakdown of spending over the last 100 years.

  4. FreemanDjango January 23, 2013 at 8:03 AM #

    That update chart is very interesting. Assuming debt mirrors the spending shown, I was VERY surprised to see that it supports Warren Buffett’s assertion. I’m not a Buffett fan and the debt is FAR too big for my tastes, but it appears we’re not even close the the limit yet. The comments from Buffett are really more in the nature of cautious optimism about the future and an apparently sincere concern for the poor, probably more acutely felt as he ages.

    As Tom above has noted, we ARE at war and it’s a BIG expense item. But, it’s interesting to look at the chart during the Vietnam era (1960′s) and see that defense spending didn’t go up relative to GDP at that time. So, it’s not inevitable.

    The article by Nate Silver is also VERY interesting and worthy of a complete post. The main point I got is that health care spending is eating up too much of the national wealth and it is increasing with no end in sight. Boomers are aging and health care is very tied to expensive, new technologies, which will simply not stop advancing. People will not refuse new treatments regardless of the cost and NO ONE wants to be the bad guy who tells people to just give up and die. It seems insoluble.

    I don’t see the analogy Nate Silver sees of the government being an insurance broker for various programs because those programs are not just insurance against unforeseen catastrophes, they’re lifetime entitlements for routine, recurrent issues that everyone faces in their life such as bouts of sickness or unemployment and retirement income needs. I see government as more of a Nanny and Sugar Daddy so people don’t have to take care of themselves and plan for inevitable tough times. To me, this makes America very weak and portends ill for the future. Unlike Buffett, I’m not optimistic about the future.

    It’s hard for me to imagine how the economy can improve much for America. It seems we need some kind of a miracle if we are to stop the gradual decline of our standard of living, let alone see it advance…

    • rich t January 23, 2013 at 10:58 AM #

      I don’t see how that update chart supports Buffet in the least. In WW2, defense was 40% of GDP — and then plummeted. Now it’s 5% of GDP.

      The takehome of the update chart is that govt spending went from 47% of the economy to less than 15% within the space of a couple years. That’s how we got out of that debt. Spending was cut massively. There is absolutely no chance of anything like that happening now.

      • FreemanDjango January 23, 2013 at 11:51 AM #

        If you’re looking at the update chart and you’re Buffett, you’re probably saying to yourself that spending was nearly 50% of GDP during WWII and it’s only 1/2 of that now. America paid down the debt after WWII, as you say, but we didn’t collapse as a result of the huge debt during the war. In fact, we prospered greatly after the War.

        Buffett may be thinking, “We’re not even close to the level of debt we had when I was a kid and America kicked ass after the War. We can still kick ass, especially with only 1/2 the debt load we had back then.”

        I doubt it, but he may be correct…

      • DCX2 January 23, 2013 at 2:35 PM #

        Perhaps you should look at what the tax rates were after World War II before proclaiming that the debt problem of that era was solved by only cutting spending. You see, back in those days, Americans were responsible enough to understand that going to war meant *raising* taxes, not cutting them.

        Also, your “down to 15%” was for all of, what, four years? The long-term average over the past 60 years seems to hover much closer to 20%, so that’s the figure you ought to be using. Notably, government spending during “the government is the problem” Saint Reagan’s administration was over 20%.

        So our spending as a percent of GDP has been fairly constant over the past 60 years, give or take 5%. And yet only in the past decade or two have we had high deficits. Hmm…deficit = spending - revenue. Spending is roughly the same, percentage wise. Deficit is higher, percentage wise. So what does that tell us about revenue?

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