From Debt-free to $16T

Brief Review of the Soaring US National Debt From Washington to Obama

1. Summary
The main purpose of the brief review of the $16T (16 trillion dollars) march of the US national debt from January 1, 1790 (when George Washington was President, his first term began on April 30, 1789) to August 31, 2012 is two fold: 1. To draw some important lessons about how and why the debt has risen to these unprecedented level and the policies adopted under previous Presidents to combat the rising debt. The lessons to be drawn are summarized at the end of the article, after the brief review of the historical data. 2. To call attention to the remarkable simple debt growth law D = ht + c where D is the debt, t is time (in some convenient reckoning, such as calendar years, or days in office), h is the slope of the D-t graph and c is the nonzero intercept made by the graph with the D-axis. We see periods of both an increase in the debt at a constant rate (fixed positive slope h > 0 with c < 0) and a decrease in the debt also at a constant rate (fixed negative slope h < 0, with c > 0). The overall trend in the debt data seems to be a movement along these straight lines with a fixed positive or negative slope, with period of transition where the systems to be going through a period of adjustment. This is akin to what we also see in the stock market, which shows periods of rapid rise and fall, with intervening sidewise movements which represent periods of adjustment. It is hoped that these lessons will serve as a basis for formulating policies that can unify the nation and move us forward to a new era of prosperity. The new nation that emerged after the Revolutionary war was mired in debt, as historians like to put it, and was also lacking a financial and banking system. Today, it appears that we are again mired in debt and sorely need a new financial and banking system
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to lead us to the prosperity that was enjoyed for nearly 200+years. From this historical review it is clear that: a) The President must take charge and put an end to the current hyperpartisan atmosphere in Washington. The President must take responsibility, just like President Reagan took full responsibility, for the tragic 73 second event that shocked the nation (and indeed the whole world) - explosion of the space shuttle Challenger, on Jan 28, 1986. b) Earlier Presidents, notably Wilson (1917), Hoover (1932), and Roosevelt (1936 and 1944) used tax policy and were not afraid to seek increases in the top marginal tax rates in order to reduce budget deficits. The top tax rate was raised to 77% under Wilson (from 7% to 15% to 67% to 77%), to 63% under Hoover, and to 79% and subsequently to 94% under Franklin D Roosevelt (during WWII). c) Before WWII, we witnessed periods of steady decline in the debt with each President viewing the debt and budget deficits as injurious to the nation. This seems to have permanently changed after WWII with no efforts being made to pay off the debt (the four consecutive Clinton budget with surpluses, in the second term, being the only exception). d) Historians summarize the initiatives of taken by FDR to get the nation out of the Great Depression with the three Rs: Relief, Recovery, and Reform. President Obama was presented with the same opportunity with his election in 2008 following the financial meltdown. Unfortunately, the nation is still awaiting the last two Rs with the first R relief still being weighed as to its effectiveness.

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Table of Contents
No.
1 2 3 4 5 6 7 8

Topic
Summary Introduction History of the debt from 1790-2012 Some important lessons to be learned Appendix I: A simple debt growth law Appendix II: The Economic Work Function List of References Cited Appendix III: Bibliography list of related articles

Page No.
1 4 6 19 25 33 40 41

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 2. Introduction
George Washington, standing on the balcony of the Federal Hall in Wall Street, New York, took the oath of office as the first US President, on April 30, 1789. He appointed Alexander Hamilton as the first Treasury Secretary. The new nation was mired in debt and lacking a modern financial and banking system.

Courtesy: http://www.aoc.gov/images/washingtons_inaugural.jpg http://media.npr.org/assets/img/2011/05/13/andrewjackson_custom52136264486de997e080b2680da1751e0d9888e8-s3.jpg? In 1790, Hamilton wrote the first report on the Public Credit and the creation of a National Bank. He championed the consolidation of all of the nations debts (mainly due to the Revolutionary War) by letting the federal government assume these debts, which would later be paid off from the governments tax revenues (tax on liquor and tariffs on imports, yes tariffs on imports, were considered to be legitimate sources of government revenues in the early days of the republic). According to the Bureau of Public Debt, on January 1, 1790, the US national debt was $71,060,508.50 ($71 million) and increased slowly at first, see Figure 1, reaching a peak value of $86.43 million in 1804, after which the debt started decreasing steadily, year after year, falling to $45.21 million in 1812, see

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http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo1.htm. The war of 1812, also called the second war of independence (declared by President James Madison), then led to a rapid rise in the debt, which crossed the $100 million mark in 1816. A new peak of $103.47 million was reached in 1818 after which the debt was reduced until it was finally completely paid off. On January 1, 1835, when Andrew Jackson was President, the recorded US national debt was just $33,733.05. Some historians say the US totally debt-free on January 8, 1835 (click here) after which the debt started rising again within the year. It has NOT stopped rising (with only brief periods of decline) and has now crossed the $16T mark ($16 trillion) on August 31, 2012. The main purpose here, following up on the analysis of the growth of the US national debt in other companion articles, is to provide a brief graphical narration of the journey from being a totally debt-free nation to a nation which is indeed mired in debt, as our founding fathers felt: $71 million seemed like a lot of debt at one time. But it was paid off, while allowing the debt to rise when the nation faced a crisis. And so too will the $16T be paid off at some time in the future. We must all really believe this if we are going to solve our problems, as President Obama puts it in his acceptance speech as the nominee of his party, for a second term. The nation is now facing a crisis, while surely being mired in not knee-deep but neck-deep debt. Let us try to understand how and why the debt has increased since 1835. Now, let us see what the history of the US national debt teaches us (see discussion by John Steele Gordon of the Wall Street Journal here, and the also a nice summary provided here, the link is http://www.kowaldesign.com/budget/, and http://news.yahoo.com/us-national-debt-hits-16-trillion-republicans-blast031301848.html By lmmartin 983 Followers

The United States National Debt 233 years in the making

This compliments the discussion that follows with the graphical plots.

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 3. History of the debt from 1790-2012

The following provides a graphical summary, with a brief mathematical analysis. The debt data used to prepare these graphs are from the Bureau of Public Debt (see Treasury Direct, click on Information on public debt and then Historical Debt Outstanding). The figures tell their own story.
140.00 120.00

US National Debt, D [$, millions] Calendar years]

War of 1812

100.00

80.00
60.00

Jan 1, 1790

40.00 20.00 0.00 1784

1792

1800

1808

1816

1824

1832

1840

Time, t [in Calendar years]

Figure 1: Initial history of the US national debt, from 1790 to 1835. The debt increased at first, reaching a peak in 1804, and was then gradually paid off. The war of 1812 led to a rapid rise in the debt which crossed the $100 million mark in 1816. It was not allowed to rise further and was completely paid off by 1835 when the US was briefly totally debt free. Yes, the national debt was $0, literally. Now, let us see how the debt started increasing again, after actually become ZERO ($0), briefly in 1835.

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US National Debt, D [$, millions] Calendar years]

80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00

Mexican war (1846) Over Texas and California

Recession (1837)
0.00 1830 1835 1840 1845 1850 1855 1860 1865

Time, t [in Calendar years]

Figure 2: Period 1835-1860, debt growth leading up to the Civil War and the election of the 16th President Abraham Lincoln in 1860. Between 1835 and 1860, leading to the Civil War, we see periods of both a rising and a falling debt but with a generally rising trend. The public debt increased due to recession and panic of 1837 (bursting of the land bubble) and the 1846 war with Mexico (over Texas and California). The war was funded by issuing what later became the basis of the US Savings Bond program. Each peak is higher than the earlier peak and each low is higher than the earlier low. The change in the debt between any two periods 1 and 2, D = (D2 D1), read as Delta D. The time elapsed between the periods, t = (t2 t1), read as Delta t. The time periods can be successive years, or several years apart. The rate of growth of the debt h= D/t is not constant, if we consider successive years in this graph. However, considering the lows in 1840 and 1857, the debt rose by D = ($28.70 $3.57) =$25.13 million over 17 years, for a growth rate h = D/t = 25.13/17 = $1.48 million per year. Likewise, between 1844 and 1854, the growth rate h = D/t = $1.88 million

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per year. The two rates are roughly similar, which means these data points fall on roughly parallel lines. This point is discussed further in Appendix I ( 5). Following this period of a gradually rising debt, there was a dramatic increase in the debt during the Civil war years, see Figure 3. The national debt crossed the $100 million mark between 1861 and 1862 and $1000 million (One Billion) mark between 1862 and 1863, see Figure 4. Because of the huge increase in the debt, the fluctuations in the debt growth, evident in Figure 2, are now completely suppressed and appear as the nearly flat debt along the horizontal axis in Figure 3.

US National Debt, D [$, millions] Calendar years]

3000 2500 2000 1500

Civil War

1000
500 0 1830

1840

1850

1860

1870

1880

1890

1900

1910

Time, t [in Calendar years]

Figure 3: Period: 1835-1900. Dramatic increase in the debt during the Civil War followed a period of steadily decreasing debt over nearly 30 years (1866-1892). The rapid increase in the debt during the Civil War years, from 1860-1866, see Figure 4, can be described the simple linear equation D = ht + c. The Debt D increases with time t. This is expressed mathematically by the relation D = ht where h is the fixed rate of growth of the debt. However, in general, at time t = 0, the debt D is nonzero. Time t = 0 can be taken as any convenient reference point,
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say the year 1790 (nonzero D), or the year 1835 (D = 0) or the year 1860 (again nonzero D), and so on. Hence we must add the nonzero c in the D-t relation. The D-t graph does NOT pass through the origin. (This point is discussed further in the Appendix I, which deals with the debt growth law.)

US National Debt, D [$, millions] Calendar years]

4000 3500 3000 2500 2000

Civil War

1500 1000 500 0 1856

1860

1864

1868

1872

1876

1880

1884

Time, t [in Calendar years]

Figure 4: The initial high rate of during the Civil War years, from 1860-1866. The slope h = D/t of the straight line is the fixed growth rate. The constants h and c can be determined using the classical linear regression analysis, developed by the French mathematician Legendre in 1805 (see discussion here). This gives the mathematical formulae for determining the equation of the best-fit line when several points on a graph seem to lie approximately on a straightly line. For the Civil War years, D = 521.32t 969,922, which indicate a very high growth rate of h = D/t = $521.3 million per year. This numerical value for the debt growth rate h is also confirmed if we consider the debt figures for the successive years, 1861, 1862, and 1863 with debts of $90.58 million, $524.18 million, and $1119.8 million which yields growth rates of $433.6 million per year, $595.59 million per year, and $696.01 million year. The slope of the best-fit line can thus be thought of as a
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statistical averaging of these successive yearly growth rates. The overall growth rate considering the end points 1860 and 1866, h = $451.4 million per year. Following the rapid increase in the debt during the Civil War years, the national debt started decreasing, year after year, for a period of nearly 30 years. This is illustrated in Figure 5.

US National Debt, D [$, millions] Calendar years]

3500 3000 2500 2000 1500 1000

Civil War

A
0 1830

500

1840

1850

1860

1870

1880

1890

1900

1910

Time, t [in Calendar years]

Figure 5: The declining debt immediately following the Civil years can be described mathematically by the two straight lines labeled A and B on this graph with the general equation D = ht + c. The constants h and c were deduced using linear regression analysis by considering the time periods 1866-1872 (Line A) and 1879-1890 (Line B). The interim years represent a period of adjustment and the debt data shifts from Line A to Line B. The linear regression equations are: D = -83.6t + 158,784.5 for line A, 1866-1872, linear regression coefficient r2 = 0.9718, with h = -83.6 and the debt is decreasing at the rate $83.6 million per year
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D = -61.24t + 117,277 for line B, 1879-1890, linear regression coefficient r2 = 0.9168, with the debt decreasing at $61.24 million per year. Alternatively, one can envision the same debt data in Figure 5 as following the two nearly perfect parallels A and B in Figure 6. Only the decreasing debt data, between 1866 and 1890 is plotted here, while ignoring (for the purposes of clarity), the rising trend between 1890 to 1899. The first of these parallels A is the straight line joining the data for 1866 and 1872 with the equation D = -86.67t + 164,490. The second, line B, is the straight line joining the data for 1879 and 1887 with the equation D = - 86.6t + 164,876. The two slope h = -86.67 and h = 86.6 differ only in the second decimal point.

US National Debt, D [$, millions] Calendar years]

3500.00 3000.00 2500.00

2000.00
1500.00

B A

1000.00 500.00 0.00 1856 1860 1864 1868 1872 1876 1880 1884 1888 1892 1896

Time, t [in Calendar years]

Figure 6: Alternative view of the decreasing debt data from 1866-1890. The data can be seen to follow the two nearly perfect parallels labeled A and B, with a transition occurring between 1873 and 1879. The debt was flat between 1873-1876 and increased very slightly between 1876-1879.

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We see an exactly similar movement of the debt data along what appears to be nearly perfect parallels in the early years of the new nation, between 1790 and 1796, see Appendix I. We also see a similar movement between nearly perfect parallels if we consider the more recent debt for the Clinton and the Bush-II years. This has been discussed in the companion article, click here. Considering quarterly values (daily values, from which the quarterly values can be deduced, are only available through 1993), the slopes of the straight lines describing the debt growth data are almost identical. D = 0.00091t + 4.87 where D is in trillions and t in days for the initial Clinton data and D = 0.00094t + 5.72 for the initial Bush data, see Figure 4 in the cited article.

US National Debt, D [$, billions] Calendar years]

50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 1896 1904 1912 1920 1928 1936 1944 1952

D C

Entry into WWI

Time, t [in Calendar years]

Figure 7: Period 1900-1940 illustrating the rapid rise in the debt with the US entry into World War I (1917-1919, President Wilson). This was followed by sustained period of budget surpluses in the 1920s, which led to the reduction in the national debt. The debt started rising again the 1930s due to the events that led to the Great Depression and a period of unprecedented crisis in the US history, akin to what we are witnessing now since the financial meltdown of 2008. The debt crossed the
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$100 billion mark after the using entered WWII (after Pearl Harbor was bombed in 1941, not covered here). The US entry into World War I (during President Wilsons term) again resulted in a short period of rapidly rising debt. However, the debt was again paid off at the end of the war. The US experienced a sustained period of budget surpluses in the 1920s (a report covering this period is available in the budget submitted by President Clinton for fiscal year 1996, click here). The straight labeled C, with the equation D = -0.9796t + 1906.4, with r2 = 0.9847, describes this trend. Here D is in billions of dollar and slope h = -0.9796 means that the debt was decreasing at a fixed rate of nearly one billion dollars per year during this era. The debt then started increasing again in the 1930s, following the straight line labeled D, with the equation D = 2.96 t 5699.7, with r2 = 0.9879.

US National Debt, D [$, billions] Calendar years]

350 300 250 200 150

Entry into WWII

100 50 0 1940

1942

1944

1946

1948

1950

1952

Time, t [in Calendar years]

Figure 8: Rapid increase in the debt with the US entry into World War II (WWII) following the bombing of Pearl Harbor in 1941. Note that the debt crossed the $100 billion mark in 1942 and had doubled to $200 billion by 1944.
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The pattern or rapidly rising debt and the gradual efforts of pay off this debt, following the US entry into World War II (President Franklin D Roosevelt), is revealed in Figure 8. In fact, the pattern here is remarkable in being exactly similar to that observed earlier during the Civil war years, Figure 4. The straight line labeled A here, with the equation D = 62.09t -120500, with D in billions, joins the data for 1942 and 1945 with the data for 1943 and 1944 falling practically on the same line. The debt growth rate h = dD/dt = $62 billion per year, is nearly 20 times the growth rate observed in the 1930s, line D in Figure 7 which is related to Great Depression. The debt was growing at the rate of nearly $3 billion per year. In other words, the war efforts and accelerated military spending led to a higher increase in the debt growth rate than the events related to the Great Depression (reflecting a mixture measures taken to address bank and financial sector issues and increased social spending to alleviate the depression conditions).

US National Debt, D [$, billions] Calendar years]

1600
1400 1200 1000 800 600 400 200 0 1936

1944

1952

1960

1968

1976

1984

1992

Time, t [in Calendar years]

Figure 9: Period 1940-1983. The first trillion dollar march, with the debt crossing the $1T mark in 1981 with President Reagan in office. The debt crossed the $100 billion mark (1942-1943) after the US entered World War II (following the
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bombing of Pearl Harbor in 1941). It had doubled to $200 billion in 1994 and had quadrupled crossing the $400 billion mark in 1971-1972. However, as we see from debt growth data in Figure 9, the dip in Figure 8, unlike the earlier dips, was a temporary one. Instead of paying off the debt, the US is now gradually accumulating more and more debt. The D-t graph is nearly flat going into the 1960s after which the debt growth rate seems to have greatly accelerated. The $1T (one trillion) mark was reached in 1981, immediately after President Reagan took office and the $4T mark was reached in 1992, as the senior Bush single term was coming to an end. The acceleration in the rate of growth of the debt (i.e., increase in the slope h of the D-t graph) is best illustrated by considering the rapid rise in the debt for the years 1960-1983, as the debt rose to and crossed the $1T mark in 1981-1982. This can be compared with the debt growth rate for the preceding period 1948-1964.
340.0

US National Debt, D [$, billions] Calendar years]

320.0 300.0 280.0 260.0 240.0 220.0 200.0 1940

Best-fit line (1947-1963) D = 3.05t -5689 with r2 = 0.9953 Also, D = 2.84t 5273 joins 1948 and 1960 data (dashed line)

1944

1948

1952

1956

1960

1964

1968

Time, t [in Calendar years]

Figure 10: The debt growth for the period 1945-1963. The straight line joining the data for 1948 and 1961 provides a good description of the general rising trend.
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US National Debt, D [$, billions] Calendar years]

2000 1800 1600 1400 1200 1000 800 600 400 200 0 1956 1960 1964 1968

D = 1.27(t 1958)2.1 + 110

$1T mark
D = 1.3(t 1958)2.05 + 250
1972 1976 1980 1984 1988 1992

Time, t [in Calendar years]

Figure 11: The rising slope of the D-t graph as the US after the post WWII era. This implies an acceleration in the debt growth rate, i.e., the dD/dt increases ad debt D (and or time t) increases. Instead of a linear (straight line) relation, as in Figure 10, we find a nonlinear relation for the post WWII era, described by a power-law curve with the general equation D = m(t t0)n + c, see Figure 11. Here t = t0 is some convenient reference year (here taken as 1958) when the debt D = c, the reference value. For n = 1, the power law reduces to the equation for a straight line. The lower curve with n = 2.05 and m = 1.3 and c = 250 provides a good fit for the years 1972-1982 whereas the upper curve with n = 2.1, m = 1.27 and n = 110 fits the earlier data and also the 1983 data point. The slope of the graph, given by the derivative dD/dt = n(D c)/t depends on the numerical value of the exponent n and the D and t values. Since the exponent n 2, the curve approximates a parabola for which n = 2, exactly. Also, since n > 1, the slope dD/dt keeps increasing as both D and t increase. (Note: The constant c is adjusted and is NOT equal to the debt for the year 1958.)
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A fixed debt growth rate means dD/dt = constant, as when the debt is increasing (or decreasing) following the linear law. The slope of the D-t graph is constant. This is like a car moving at a fixed speed. The debt level D is like the position of the car. An accelerating debt growth rate, on the other hand, means that the slope dD/dt of the D-t graph is also increasing as D and t increase. When a car is accelerating, its speed is increasing and so it will cover the same distance in a smaller time. Likewise, when the debt growth rate is accelerating, higher and higher debt levels will be reached in short times. This explains why the debt rose very rapidly from a little over $200 billion in 1944 to just under $1T ($1000 billion) in 1981, in just 37 years.

US National Debt, D [$, trillions] Calendar years]

5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 1976

$4T mark
D = 0.05(t 1976)1.55 + 0.35

$1T mark
1980 1984 1988 1992 1996

Time, t [in Calendar years]

Figure 12: The acceleration in the debt growth rate, i.e., increasing dD/dt, during the Reagan-senior Bush era, as the debt quadrupled from $1T level to the $4T level between 1981-1992. The exponent n = 1.55 is less than the exponent n > 2, in the earlier era (from 1958 to 1982). Increasing military spending and reducing income taxes (supply-side economics) are believed to have contributed to the rising deficits and debts (click here).
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We also see a similar acceleration (n > 1) in debt growth rate for the Reagan-senior Bush years, see Figure 12, and also the junior Bush years (2001-2009), as discussed in the companion article comparing the debt growth with the Obama years (see Figure 4 here). The final growth rate dD/dt for the Bush years was more than four times the initial growth rate. This higher, final, growth rate became the initial growth rate for the Obama years. (The overall D-t graph can be described by a power-law with exponent n = 1.24.) This is the reason why the debt has already increase in the debt for the Obama partial term is higher than the total increase in the debt for the two Bush terms (see discussion of Clinton-Bush-Obama transition here). The debt increased by $4.899 T for the Bush years whereas it has already increased by $5.360 T in the Obama years.

US National Debt, D [$, trillions] Calendar years]

20.00
18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Time, t [in Calendar years]

Figure 13: Period 1976-2012. The national debt crossed the $1T (one trillion dollar) mark in 1981 when Reagan was President. It has quadrupled and crossed the $4T mark in 1992 when the senior George Bush was President. It has again quadrupled, crossing the $16T mark on August 31, 2012 during the Obama presidency. The debt was increasing at a fixed rate, indicated by the line labeled
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line A, between 1985-1995. The slope of this line matches the initial debt growth line during the Clinton presidency (click here for details). It then started increasing rapidly, following Line B with the steeper slope. This acceleration in debt growth rate coincides with the unprecedented financial crisis experienced in 2008. Note also the significant slowing down in the debt growth rate in the Clinton years (1993-2001). The debt was lower than predicted by Line A. The lower rate established during this era was thus able to cushion the debt increases due to the war on terrorism, following 9/11 and the two Bush wars, starting 2003. The debt started rising above line A only in 2008, following the financial crisis.

4. Some Important Lessons to be learned

No more just Hope and Change. We the People must DEMAND change from our elected officials. Both the national debt level and the unemployment level (i.e., absolute number of unemployeds, as opposed to just the unemployment rate) are too high and destroying the very fabric of what the United States has come to mean in the generations past. The following are some lessons that can be learned from this brief review of the history of the national debt, which compliments that narrative version provided by Immartin, with the addition of the graphs and a few simple equations to describe the observed trends. First, here are some fact about the debt itself and how we got there. 1. Our founding fathers, both George Washington and Thomas Jefferson, and most previous Presidents, notably Andrew Jackson, have all considered the public debt (the debt held by the nation) to be seriously injurious to the welfare of the nation. Jefferson believed that debts incurred must be paid off in 19 years. The data presented here graphically in Figure 1 is testimony to the diligent pursuit of becoming a debt-free nation by all our Presidents from Washington to Jackson. The war of 1812, declared by President Madison,
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was funded with borrowed funds (bond issues) and through increase in Federalist taxes (click here). 2. The nation has not been afraid to incur debt, heavy debt, in times of crises. We have several instance of rapidly increasing debt levels: the war of 1812 (President Madison, Figure 1), the Civil War (President Lincoln, Figures 3 and 4), entry into World War I (President Wilson, Figure 7), and entry into World War II (President Franklin D Roosevelt, Figure 8). The debts incurred after the war of 1812, the Civil war, and with the entry into WWI, were followed immediately by a sustained period of decreasing national debt (Figure 1, Figures 5, 6, and 7). 3. Something fundamentally changed in the general outlook towards the public debt after WWII on the part of both the elected officials (and the citizens who supported them in their quest for office). This debt was never paid off. According to the Keynesian view, at times of high unemployment and low demand (such as we are experiencing now in 2012 and over past several years just after and preceding the financial crisis of 2008), the deficit will not cost anything. It can be used to keep people employed and thus increase productivity. The problem arises from wasteful expenditures that do not add significantly to government assets or to the wealth of the economy. In the years following WWII, the debt grew very slowly at first (Figures 8 to 10) and then at an accelerating rate (Figures 11 and 12), as follows: A quadrupling from about $200 billion in 1944 to over $800 billion by 1978. A quintupling from ~ $200 billion in 1944 to reach the $1T mark by 1981. Another quadrupling of the debt from 1981 to 1992, to reach the $4T mark. A third quadrupling from 1992 to August 31, 2012 to cross the $16 T mark.

Now, here are some fact regarding the policies that were adopted by our founding fathers and the President of earlier terms to consciously stem the rise of the debt in times of crises. The crises were mostly wars. However, we also have two instances of serious problems with the financial and the banking sector, leading to a collapse of the economic system and its impact on the debt.
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 First, the short lifespan of the zero debt, due to the bursting of the land speculation bubble (click here), fueled by availability of easy credit (Jackson was able to pay off the debt by selling public land as the nation expanded westwards, this also eventually led to a financial crisis when Jackson insisted that all sales must be paid by gold or silver coins, not paper money). Second, the stock market crash (1929) and the Great Depression that followed, again have the roots in problems created by the financial sector. The following measures were adopted at earlier times to combat the problem of rising public debt, or in case of the early days of the new republic, to pay off the consolidated det. Among these were: 1. Tariff on imported goods was considered perfectly legitimate source of government revenues. (President Washington and others who followed supported this type of a tax.) A tariff, called the Black Tariff, was imposed to 1842, following the panic and the recession of 1837. 2. The top tax rate, see Figure 14 for a graphical display of the full history, has been increased repeatedly at times of crises, to increase government revenues and stem the rising debt. Consider the following examples. The most dramatic increase in the top tax rate was from 7% to 15% to 67% and then 77% as the US entered WWI. President Wilson persuaded the Republicans to support him to avoid budget deficits and in an increase debt due to the cost of the war. The top tax rates were reduced in subsequent years. The top tax rate was again raised from 25% to 63% under President Hoover, in 1932, to combat the effects of the stock market crash (1929) and the Great depression that followed (click here). The top tax rate was increased to 79% in 1936 (President Franklin D Roosevelt) again to combat the effects of the Great Depression and promote economic recovery. The top tax rate was gradually increased as the US entered WWII and was 94% at its highest in 1944 and 1945.
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100.0

Top marginal tax rate, m %

90.0 80.0 70.0 60.0 50.0

WWI

Kennedy

WWII

40.0 30.0 20.0 10.0 0.0 1904

1924 1944

Reagan

1964

1984

2004

2024

Time, t [in Calendar years]

Figure 14: The top marginal tax rate over time. The divisive Bush tax cuts, engaging our current political discourse, are miniscule compared to the Reagan tax cuts, or even the Kennedy tax cuts (although it became effective only in 1964). Source: http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213. The top tax rate stayed at 91% (after a brief drop going to 82.13% in 1948) from 1951 to 1960 (with 92% for 1952). The top tax rate was decreased in 1964 to 77% and to 70% in 1965, raised again, and then stayed at 70% from 1971-1980. The Reagan era saw the biggest cuts in the top tax rates: to 50% 1982-1986, to 38.5% in 1987 and to 28% in 1988 and 1989. During the senior Bush presidency the top tax rate went up to 31% and was increased again to 39.6% under Clinton. The next tax cuts came with the Bush presidency, when the top rate was reduced to 38.6% (2001-2002) and then to 35% where it has stayed to date.

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Thus, it is clear that historically, using tax policy (including tariffs on imported goods) to control budget deficits and hence the debt, is a long standing American tradition, practiced by several Presidents. It was especially used by both Wilson and FDR during war years, and also used by none other than Hoover, after the stock market crash to combat the ensuing depression. The effect of taxing the rich as a strategy for budget deficit reduction (and therefore the debt), using actual data available from the Internal Revenue Service, has also been the subject of recent studies. The increase in potential revenues, even with a doubling of the top tax rate to 70% does not appear to very significant, consider the trillion budget deficits that are now being encountered. Nonetheless, this should be considered again, following the Wilson presidency as the model. Finally, let us be honest about how these deficits and debts are being reported. I am sure there will be serious repercussions if discrepancies such as those noted below appear in the financial reports of a private company. The following is a verbatim quote from comments by the economics historian, Gordon, cited earlier, and is worth recalling as a part of our present discussion; see also October 7, 2008, SA Today on the deficit for the fiscal year 2008 (click here).
It has been widely noted that 2009 will have the first "trillion-dollar deficit" in American history. Actually it's the second. In fiscal 2008 (i.e., under President George Bush), the national debt increased from $9 trillion ($9.008) to slightly over $10 trillion ($10.025). Yet the budget deficit in the last fiscal year was officially reported as being $455 billion. How could the national debt have increased by considerably more than twice the "deficit"? Simple. Just call the money borrowed from the Social Security trust fund an "intragovernmental transfer" and exclude it from the calculation of the deficit.

According to USA Today, the estimated budget deficit for then just concluded fiscal year (ending Sep 30, 2008) was $438 billion, with the previous record being $413 billion for 2004. The highlights in bolded blue are my emphasis. Note also the highlight in blue which I have underlined to call attention. Apparently, the problem pointed out by Gordon (about the discrepancy between the rise of the debt and reported budget deficit) is NOT limited to just FY2008. This same pattern
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seems to be continuing with each budget deficit since then being lower the change in the national debt, see Table I below.

Table 1: Budget Deficit and the change in reported Debt

Year Total Total Deficit Receipts Outlays $ billions $ billions $ billions 2567.98 2523.99 2104.99 2162.72 2303.47 2728.69 2982.54 3517.68 3456.21 3603.06 160.7 458.5 1412.7 1293.5 1299.60 Deficit $ trillions National Debt Change Debt from prior $ trillions year $ trillions 9.008 10.025 1.017 11.910 1.885 13.562 1.652 N/A

2007 2008 2009 2010 2011

0.161 0.459 1.413 1.294 1.300

Source: Receipts, outlays, and deficits from historical tables (click here) provided in the document entitled The Budget of the US Government, available for each fiscal year; specifically Table 1.1 on page 21 in Fiscal Year 2012, Budget of the US Government. The debt values are from Bureau of Public Debt, specifically Treasury Direct, Historical Debt Outstanding (click here). The change in the debt compared to the prior year must be EXACTLY equal to the budget deficit. The deficit values for 2008, 2009, 2010, are all lower the year-to-year change in the debt given in the last column. The discrepancy pointed out by Gordon does NOT appear to be an isolated occurrence.

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 5. Appendix I A simple debt growth law

The historical accounting the public debt (to the penny!) in the United States offers an interesting opportunity to study a seemingly complex problem using simple mathematical models. This leads us to what may be called the debt growth law. In general, as was the case of the new nation called the USA, at some time t = t0, which can be taken as any convenient year in our reckoning, the debt is nonzero. The debt D then either increases or decreases as time t increases. Hence, the simplest equation relating the debt D and time t is the linear equation, D = h(t t0) + k = ht + c (1)

For the US, the calendar year 1790 is the time t0. This is the earliest date for which the debt is available. At this time the debt was nonzero and k = $71, 060,508.50 (to the penny!) $71.06 million. The simpler equation D = ht + c, can be used where the constant c = k ht0 absorbs t0. A slightly more complex, and perhaps also more realistic relation, is the nonlinear equation, also called the power-law equation with an exponent n, given below. D = h(t t0)n + k or D = mtn + c (2)

For n = 1, this reduces to the simpler linear law. For n > 1, the debt increases at an accelerating rate since the slope dD/dt increases as D and t increase. For n < 1, the debt decreases at a decelerating rate, since the slope dD/dt decreases and both D and t increase. The values of the unknown numerical constants can be deduced using statistical methods (e.g., least squares, or linear regression analysis, which yields the best-fit line when a number of points are found to lie approximately on a straight line) or by graphing the equation (more convenient with the power-law. Taking logarithms, equation 2 can also be written as:

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log (D c) = log m + n log t

(3)

The graph of the logarithm of (D c) versus the logarithm of t will be a straight line with a slope equal to the exponent n and an intercept of log m from which we can determine m = exp (log m). Here we are using natural logarithms. Examples of both the linear and the power-law behavior have been provided in 3 of the main text describing the history of the evolution of the national debt. Here we will consider the earliest time period, from 1790 to 1835, to illustrate some important aspect of the debt growth laws. First, the decreasing pattern from 1804 to 1812 seems to follow a simple linear law, see Figure 15, as does the rise from 1812 to 1816; see Figure 16.

US National Debt, D [$, millions] Calendar years]

120.00

100.00

80.00

D = -5.42t + 9860.5 with r2 = 0.9924

60.00

40.00

20.00

0.00 1800

1804

1808

1812

1816

Time, t [in Calendar years]

Figure 15: The Revolutionary War debts and the addition to the debt due to budget deficits were quickly paid off, as we see here, as the new nation started gaining its
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foothold. After the debt reached the peak value of $86.43 million (maximum value in this graph), in 1804, increasing government revenues (due to the tax on liquor, tariffs on imports) were used to pay off the debt. The idea of income tax was conceived as result of the 1812 war (and a proposal was developed by 1814) but was never implemented. The personal income tax was finally implemented in 1861 to help fund the Civil War; see history of the top tax rate here.
160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 1808

US National Debt, D [$, millions] Calendar years]

D = 20.81t - 37671.4 with r2 = 0.9833

1810

1812

1814

1816

1818

1820

Time, t [in Calendar years]

Figure 16: Perfectly linear trend when the debt increased rapidly during the period 1812-1816, as a result of the 1812 war. The US at first tried to maintain neutrality in the wars between France and England but was eventually forced into war due to the seizure of American ships and seamen who were held hostage for a long time (click here). This debt was, however, quickly paid off once the war ended, as we see from Figure 1. The US was briefly totally debt-free in 1835. We also see the same linear pattern in the debt growth data from 1790 to 1796 as the new nation was emerging. As the socio-political-economic systems of the new nation started taking root, we find that the debt increased at first. However, and
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quite remarkably so, the he data for the three years 1791, 1792, and 1793 seem to fall on an upward sloping straight line, see Figure 17. Two points on a graph can always be joined by a straight line but there is no reason to expect that a third point should also lie either on the extension of the same line, or fall on or close to the line segment joining the two extreme points.

US National Debt, D [$, millions] Calendar years]

90.00

85.00

D = 2.448t - 4309

80.00

75.00

70.00

1790

65.00

60.00 1784

1786

1788

1790

1792

1794

1796

1798

Time, t [in Calendar years]

Figure 17: Growth of the US national debt in the first three years after the founding of the new nation. According to the Bureau of Public Debt, the debt increased from $75.46 million in 1791 to $80.36 million in 1793, i.e., by an amount D = $4.90 million in two years, t = 2, for a growth rate h = D/t = $2.448 million per year. The equation of the line joining the data for 1791 and 1793 is D = 2.448t 4309 = 2.448(t 1760.2). The 1792 data point falls very close to this line while the first known debt data falls below it. As an aside, a similar pattern has also been observed the new General Motors, which is now emerging from its bankruptcy. Profits and revenues data are only available for two full years of operation (2011 and 2010) and a partial year (2009,
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starting July 10). Nonetheless, the graph of profits versus revenues, for the years 2009, 2010, 2011, is seen to be a very nearly PERFECT straight line (click here and here for more details about the quarterly data for 1Q2010 to 1Q2011, before data for full year of 2011 became available).
90

US National Debt, D [$, millions] Calendar years]

A
D = 2.448t - 4309

85

80

75

D = 2.668t - 4707

70

65

60 1784

1788

1792

1796

1800

Time, t [in Calendar years]

Figure 18: The initial growth of the national debt from 1791 to 1796. The debt increased from 1791 to 1793 but the three data points fall on the upward line A, with the equation D = 2.448t 4309 = 2.448 (t 880.1). The debt decreased slightly between 1793 and 1794 before resuming the upward trend. The data for 1794, 1795, and 1796, however fall on another straight line B, which is roughly parallel to line A. The equation D = 2.667t 4707 = 2.667 (t 882.3) is deduced for Line B by just considering the end points. The middle point is seen to fall very close to this line. (The same procedure was also used for Line A.) Returning to the national debt, we find that the debt decreased slightly between 1793 and 1794 before again resuming its upward trend. The data for the years 1794, 1795 and 1796 seem to follow not only a straight line but follow another, roughly parallel, straight line, see Figure 18. The same movement along three
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roughly parallel lines, labeled C, D, E is again observed, when the debt was being paid off after the war of 1812, see Figure 19.

US National Debt, D [$, millions] Calendar years]

160.00

D C E

140.00 120.00 100.00 80.00 60.00 40.00

20.00
0.00 1810

1815

1820

1825

1830

1835

1840

Time, t [in Calendar years]

Figure 19: As the national debt was being paid off, after the war of 1812, the falling debt data (like the rising debt data for 1790-1796) is again seen to move along a set of three roughly parallel lines, as illustrated here. Line C joining 1816 and 1820, D =-9.08t +16,616. Line D joining 1824 and 1833, D = -9.25t + 16,966 and Line E joining 1827 and 1835, D =-9.24t +16,963; see also Figure 1. Recall also that an exactly similar movement along parallels is also observed when the debt decreased from 1866-1890, for a sustained period (Figure 6). The same movement along parallels is also observed if we consider the debt data at the beginning of the Clinton presidency (1993-1994) and Bush presidency (20012002), click here for more details. The significance of the rather simple linear law, with a nonzero intercept c, which, rather surprisingly, is very often observed when we analyze our observations on
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the behavior of many complex systems (such as the national debt problem, the unemployment problem, the financial data for individual companies, traffic fatality data, teenage pregnancy data, Olympic long jump records, and so on) has been discussed in several articles, notably in the article comparing the debt evolution during the Obama and Bush years, and the analysis of financial data for companies like Microsoft, Google, Apple, the new General Motors, and Kia Motor Company. A reference list is provided separately along with the links. A fuller bibliography is also provided in Appendix III. A very briefly discussion is provided here for convenience, in Appendix II, because of its fundamental importance. Also, a noted already, at time t = 0, according to our reckoning, the debt is nonzero. Hence, if we extrapolate far enough, the linear implies that there is some hypothetical time t = tD = (t0 - c/h), when D = 0. Since the slope h can be either positive or negative, the time t = tD is either some time in the past (when h > 0, positive slope) when the debt was zero, or some time in the future (when h < 0, negative slope) when the D will become zero (assuming the linear law extends to longer time scales, forward and backward). The existence of both a rising and a falling trend implies a nonlinear law, i.e., a smooth curve with a maximum (or minimum) point, with both positive and negative slopes. The linear segments that we observe can be taken as local manifestations of the underlying nonlinear and longer term trend. One example of such a nonlinear law, which can be derived using statistical arguments, is the power-exponential law (see, for example, the discussion in Refs. [4,5], the article on the new and old GM) with the general equation, y = mxne-ax + c and, dy/dx = (n ax)(y c)/x (4) (5)

For the problem of interest to us here, x is to be taken as time t and y as the debt D. The numerical values of the constants m, n, a, and c can be deduced by curve fitting procedures, from the data set. The slope (of the tangent to) the curve is the derivative dy/dx, given by equation 5. The maximum point occurs when dy/dx = 0,
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i.e., when n = ax or x = n/a. For x < n/a, the graph is a rising curve with a positive slope. For x > n/a, the graph is a falling curve with a negative slope. The nonzero constant c is required since the debt is nonzero at time zero of our reckoning. Alternatively, one can use a parabola, with the general equation given below, to describe the rising and falling trend. The parabola, however, is a symmetric curve but the power-exponential law has the advantage of being non-symmetric. (y b) = k(x a)2 and, dy/dx = 2k(x a) (6) (7)

Another simple model, which yields a nonlinear law, with a maximum point, is based on a combination of the linear law (y = ax) and the hyperbolic law (y = b/x). Thus, y = ax + b/x (8)

and, dy/dx = a b/x2 with dy/dx = 0 when x = xm = (b/a)1/2 (9) Extrapolations based on the nonlinear growth laws must be treated cautiously since it will usually lead to either bullish or bearish predictions (either too low or too high a debt). The Ockhams razor principle also suggests that we first try the simpler linear law for making extrapolations, at least for the short term. Also, given the changing nature of politically motivated financial laws (especially tax laws) as the elected officials, especially Presidents, enter and exit the scene, the linear law is probably the best mathematical model to study the debt problem, especially the annual data. The power-law can be used to analyze quarterly data, even for a single presidency, and more so when we wish to analyze the long term trend over several decades.

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 6. Appendix II The Economic Work Function Extension of Einsteins work function

As we know, the US national debt is the sum total of all the budget deficits that have been incurred since the founding of the new nation. If the government spending (also called outlays) exceeds the receipts, such as the revenues from taxes, there is a deficit. If the receipts exceeds outlays, there is a budget surplus.

Table 2: US Government Budget during the Clinton years

Receipts, Outlays, Deficit/Surplus $ billions $, billions $, billions 1257.7 1460.9 -203.2 1994 1258.7 1461.9 -203.2 1994 1351.9 1515.9 -164 1995 1453.2 1560.6 -107.4 1996 1579.4 1601.3 -21.9 1997 1722.0 1652.7 1998 69.3 1827.6 1702.0 1999 125.6 1991.4 1863.2 2001 128.2 2025.4 1789.2 2000 236.2 Source: Fiscal Year 2012 Historical Tables, Budget of the US Government (click http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf ) The US last enjoyed surpluses, for four years in a row, during the Clinton years, see Table 2. Each year, the national debt will increase (or decrease) by an amount equal to the budget deficit (or surplus). This is actually an inviolable law, akin to other laws of nature and can be expressed in the form of a simple mathematical equation as follows. Surplus (Deficit) = Receipts Outlays (A1) Year

This debt law is exactly similar to other far-reaching laws such as:
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Profits = Revenues Costs Unemployed = Labor force Employed Work = Heat in Heat out

(A2) (A3) (A4)

Equation A2 describes the financial behavior of all companies, big and small. The ratio profits/revenues = y/x is called the profit margin where x is revenues, the independent variable, and y is profits, the dependent variable. Equation A3 describes the unemployment problem, which is also engaging the nations attention. The ratio Unemployed/Labor force = y/x is called the unemployment rate. Equation A4 is the fundamental equation which describes the behavior of all heat engines (such as the modern automobile, a rocket engines that took Curiosity to Mars, jet engine that we find on all airplane, locomotive engines, and so on). The ratio Work/Heat in is called the efficiency of the engine. Equation A4, when broadly generalized, is also known as the law of conservation of energy. What is the relationship between revenues x and profits y, or the labor force x and the number of unemployed y, or the work that an engine does and the heat input? Very briefly, we find, as we have seen here while studying the US national debt, that a simple linear law y = hx + c = h(x x0), often describes the relationship between a wide variety of the (x, y) observations that we make in the world around us. Such a linear law can be compared to Einsteins photoelectric law which can is also a linear law and is written as K = E W = hf W = h(f f0). Thus, the nonzero constant c is just like the work function W in Einsteins law. As applied to problems such as the national debt problem, the unemployment problem, or the profit-revenues data analysis, the nonzero c may be thought as the economic work function, and extension of the idea of a work function introduced in the 1905 paper by Einstein. In this paper, Einstein starts with a simplified version of Plancks blackbody radiation law (proposed in December 1900, which marks the birth of quantum physics). This simplified Planck law (which is

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mathematically analogous to the power-exponential law given as equation 4 in Appendix I) is used to discuss a property called the entropy of light. This leads Einstein to the conclusion that light can be viewed as a stream of particles (which are now called photons) each having the energy E = hf where h is a universal constant (now called the Planck constant) and f is the frequency of light. (The idea of frequency means light is also a wave-like characteristic. Thus, Einstein was essentially introducing what is now called the dual, particle-wave view of all matter, light, and radiation in general). The particle concept, which Einstein invokes here, was originally conceived by none other than Newton himself, who thought of light as particles (then called corpuscles) with a fixed momentum, each obeying his laws of mechanics. The colors of the rainbow were due to light particles having different momenta. But, predictions based on the particle view of Newton did not agree with experiments and the wave view of light was therefore the widely accepted view in 1905. The young Einstein was thus reintroducing an old idea with a new twist instead of fixed momenta Einstein associated a fixed energy E = hf with each particle. After taking this bold step, Einstein proposes an experimental test of the new particle view of light. Experimental observations on a phenomenon called the photoelectric effect showed that there is a cut-off frequency. This could NOT be explained on the basis of the wave theory of light and puzzled physicists of the late 19th and early 20th centuries. Then came the young Einstein, with his hypothesis of light being a stream of particles (photons) each having a fixed energy E = hf. When light shines on the surface of a metal, the photons with energy E = hf bombard the surface and knock out electrons from within the metal. The electrons can be collected and made to flow in an external circuit. Modern photocells work on this principle. Not all of the energy E of the photon can appear as the (kinetic) energy K of the electron. Some of the energy E must be given up in order to do the work needed to overcome the forces that bind the electron to the metal. This depends on the nature of the metal on which light shines. Einstein proposed a simple solution to this complex problem. Let W denote the work that must be done to produce the electron. Hence, the maximum kinetic energy K = E W. Since E
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= hf, it follows that K = hf W = h(f f0) where f0 = W/h is the cut-off frequency. If f < f0 no electrons will be observed (no photoelectric current) since K is less than zero when f < f0. Thus, the idea of a work function W, coupled with the idea of light as photons with energy E = hf, provides a simple explanation for the photoelectric effect. Einsteins photoelectric law also means that the K-f graph is a straight line with a slope h, the Planck constant, one of the fundamental constants introduced by Max Planck into physics, in December 1900, when he developed his revolutionary quantum physics. The young Einstein was actually borrowing from Planck and extending the idea of a quantum of energy E = hf to light. Einsteins explanation of the photoelectric observations thus also provided a new method of measuring the Planck constant h directly, from experiments. Finally, Einsteins law also means that the K-f graph is a series of parallels. Each member of this family of parallel lines is associated with its own unique value of the work function W. When the work function W changes (such as when light shines on different metals, say lithium and sodium), the K-f data will shift to a new parallel. The present author is of the opinion that it is exactly the generalization of this idea of a work function that is responsible for the movement along parallels what often observe when we analyze the (x, y) observations for a wide range of problems. For example, profits and revenues data for Microsoft, a company that has set a standard of excellence as far as financial performance is concerned (in July 2012, Microsoft reported its first ever quarterly loss, in 26 years, as a public company, since its founding in 1986, see here Bill Gates reaction), is found to move along a set of parallel lines, exactly similar to the movement along parallels that we see with the national debt data. The revenues of a company, or the receipts of the US government, are exactly analogous to the energy E of the photon. Some of this revenue must be given up to produce a profit, just as some of the energy of the photon must be given up. The difference is called the costs of the operation. The receipts of the government do not all appear as surplus. The total outlays, or the total government spending, is like the costs for a company. (This viewpoint is supported by the analysis of the
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budgetary data the Clinton years and the profits-revenues data for Google, for the years 2000-2002, see Table 3.)

Table 3: Profits-Revenues data for Google (Early years)

Revenues, Costs, Profits/Loss $ millions $, millions $, millions 19.108 33.798 -14.69 2000 86.426 79.441 6.985 2001 439.51 339.854 99.66 2002 Source: Google Annual Report for 2004 (click here). 10-K filing with US Securities and Exchange Commission for FY ended Dec 31, 2004; see Item 6, Selected Financial Data. Since Profits = Revenues Costs, the costs in the third column are the deduced from the profits (net income) and revenues values. Google reported a loss in 2000 and has since reported a profit (see more detailed analysis presented in Ref. [9], click here.)
400 300 200 100 0 -100 -200 -300 0 500 1000 1500 2000 2500

Year

Surplus, y [$, billions]

Clinton years y = hx + c = h(x x0) = 0.5845x 945.04 = 0.5845 (x 1616.93) r2 = 0.998

Receipts, x [$, billions]

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Figure 20: The US last enjoyed a budget surplus, for four consecutive years, under President Clinton. As the government receipts increased during the Clinton years, surpluses also increased, following a simple linear law as shown here. When receipts were lower, during the first term, the surplus was replaced by a deficit. The best-fit line through the data has the equation y = hx + c = h(x x0) = 0.5845x 945.043 = 0.5845 (x 1616.933), with a linear regression coefficient r2 = 0.998. The data for FY2000, which clearly falls below the line representing the upward trend, was excluded from the linear regression analysis. This linear law implies that when the receipts x exceed the minimum or cut-off level of x0 = 1516.933 billion, deficits will disappear and will be replaced by surpluses. The receipts for the years 1998 to 2001 all exceed this minimum level.
140 120

Profits, y [$, millions]

100 80 60 40 20 0 -20 -40

Google (2000-2002) y = hx + c = h(x x0) = 0.272x 19.89 = 0.272 (x 73.12)

100

200

300

400

500

600

Revenues, x [$, millions]

Figure 21: The profits-revenues graph Google during the early years (2000-2002). Google reported a loss in 2000 (the only loss reported) when revenues were low. Once revenues exceeded a minimum, or cut-off, level x0 profits appeared and Google has reported profits ever since. The data for the first three years again reveals a nice linear relationship, y = hx + c, relating revenues and profits. An
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exactly behavior, when profits and revenues following a linear law, has been observe d with the post-bankruptcy new GM, see Ref. [4]. We see an exactly similar behavior when we analyze the profits and revenues data for several companies, especially good company which have set the standard for financial performance such as Microsoft, Apple, and Google to name a few. Surpluses are just like profits and receipts are just like revenues. When revenues fall below a minimum level, the company will report a loss, just as the government must report a deficit. In the case of Google, a loss was reported for only the year 2000 when revenues were quite low. However, when revenues increased, Google moved into the positive territory from the negative, with the data again following the simple linear law y = hx + c = h(x x0) with x now being the revenues and y the profits (replaces receipts and surpluses). Thus, energy in physics is, mathematically speaking, exactly analogous to money in economics. The cut-off frequency f0 = W/h is exactly analogous to the cut-off revenues x0 = - c/h that must be exceeded for a company to produce a profit. Hence, the nonzero intercept c can be thought of as the economic work function, exactly analogous to Einsteins work function in physics. Not all of the heat input to an engine is converted into useful work (equation A4). Some of the heat must be given up and appears as the heat lost to the environment. Some of the revenues generated by a company appears as costs which is essentially money from its customers which is distributed to its vendors, suppliers, and others with whom the company does business in order to generate its profits. Some further mathematical justification (including discussion of the idea of entropy which can be easily extended outside physics) may be found in the articles listed. As applied to the debt problem, the surplus (or deficit) is exactly analogous to the profits of a company. The revenues collected by the government (receipts), in the form of taxes, are then distributed back into society in the form of outlays (just like a company spends its revenues to meet its costs). The difference is the surplus or the deficit. The nonzero intercept c in the simple law D = ht + c is exactly analogous to the work function.
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 7. List of References Cited

1. The US National Debt Growth Rate: The Clinton-Bush-Obama Transitions, Sep 6, 2012. www.scribd.com < http://www.scribd.com/doc/105058946/The-US-National-Debt-Growth-RateThe-Clinton-Bush-Obama-Transition > 2. The Rate of Growth of the National Debt: The Obama versus Bush years, Sep 4, 2012. www.scribd.com < http://www.scribd.com/doc/104803209/TheRate-of-Growth-of-the-National-Debt-The-Obama-versus-the-Bush-years > 3. Is Taxing the Rich an Option for Budget Deficit Reduction?, Sep 2, 2012. www.scribd.com < http://www.scribd.com/doc/104661297/Is-Taxing-the-Richan-Option-for-Budget-Deficit-Reduction > 4. Why Cant General Motors be more like Microsoft?, Aug 22, 2012. www.scribd.com < http://www.scribd.com/doc/103607023/Why-Can-tGeneral-Motors-be-more-like-Microsoft-The-new-GM-may-just-be > 5. GM Before the Bankruptcy: Maximum point on the Profits-Revenue Graph, Aug 25, 2012, www.scribd.com < http://www.scribd.com/doc/103607023/Why-Can-t-General-Motors-be-morelike-Microsoft-The-new-GM-may-just-be > 6. The new GM: A Brief Analysis of the Profits-Revenues data through 1Q2011, Aug 22, 2012, www.scrib.com < http://www.scribd.com/doc/103600274/The-New-GM-A-Brief-Analysis-ofthe-Profits-Revenues-Data-through-1Q2011 > 7. A Second Look at Microsoft after the Quarterly Loss, July 30, 2012, www.scribd.com < http://www.scribd.com/doc/101518117/A-Second-Look-atMicrosoft-After-the-Historic-Quarterly-Loss > 8. The Perfect Apple II, July 30, 2012, www.scribd.com < http://www.scribd.com/doc/101503988/The-Perfect-Apple-II > 9. Google: A Lovable One-trick Pony, Another Single Product Company Analyzed Using the New Methodology, July 1, 2012, www.scribd.com < http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology > 10. Kia: A Disappearing Brand, July 6, 2012, www.scribd.com http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology
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11. On a Heuristic Point of View about the Creation and Conversion of Light, by A. Einstein, esfm2005.ipn.mx http://www.esfm2005.ipn.mx/ESFM_Images/paper1.pdf . See also, hermes.ffn.ub.es http://hermes.ffn.ub.es/luisnavarro/nuevo_maletin/Einstein_1905_heuristic.pdf 12. Einsteins Quanta, Entropy, and Photoelectric Effect, sigmapisigma.com, by Dwight E. Neuenschwander, Fall 2004, http://www.sigmapisigma.org/radiations/2004/elegant_connections_f04.pdf 13. Fiscal Year 2012, Historical Tables, The Budget of the US Government,
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf

8. Appendix III: Bibliography

Related Internet articles posted at this website Since the Facebook IPO on May 18, 2012
The first article listed below discusses a little known mathematical property of a straight line. Figures 1 to 3 in this article provide the philosophical basis for considering the significance of a nonzero intercept c as it applies to many problems in the real world. We make observations (x and y values of interest to us) to deduce y/x, usually called rates, ratios, or percentages. 1. http://www.scribd.com/doc/102000311/A-Little-Known-MathematicalProperty-of-a-Straight-Line-Strange-but-true-there-is-one Published August 4, 2012. Financial data (Profits-Revenues) analysis and Generalization of Plancks law beyond physics. 2. http://www.scribd.com/doc/95906902/Simple-Mathematical-Laws-GovernCorporate-Financial-Behavior-A-Brief-Compilation-of-Profits-RevenuesData Current article with all others above cited for completeness, Published June 4, 2012 with several revisions incorporating more examples.
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3. http://www.scribd.com/doc/94647467/Three-Types-of-Companies-FromQuantum-Physics-to-Economics Basic discussion of three types of companies, Published May 24, 2012. Examples of Google, Facebook, ExxonMobil, Best Buy, Ford, Universal Insurance Holdings 4. http://www.scribd.com/doc/96228131/The-Perfect-Apple-How-it-can-bedestroyed Detailed discussion of Apple Inc. data. Published June 7, 2012. 5. http://www.scribd.com/doc/95140101/Ford-Motor-Company-Data-RevealsMount-Profit Ford Motor Company graph illustrating pronounced maximum point, Published May 29, 2012. 6. http://www.scribd.com/doc/95329905/Planck-s-Blackbody-Radiation-LawRederived-for-more-General-Case Generalization of Plancks law, Published May 30, 2012. 7. http://www.scribd.com/doc/94325593/The-Future-of-Facebook-I Facebook and Google data are compared here. Published May 21, 2012. 8. http://www.scribd.com/doc/94103265/The-FaceBook-Future Published May 19, 2012 (the day after IPO launch on Friday May 18, 2012). 9. http://www.scribd.com/doc/95728457/What-is-Entropy Discussion of the meaning of entropy (using example given by Boltzmann in 1877, later also used by Planck to develop quantum physics in 1900). The example here shows the concepts of entropy S and energy U (and the derivative T = dU/dS) can be extended beyond physics with energy = money, or any property of interest. Published June 3, 2012. 10.The Future of Southwest Airlines, Completed June 14, 2012 (to be published). http://www.scribd.com/doc/102835946/The-Future-for-SouthwestAirlines-The-Unknown-Story-of-Rising-Costs-and-the-Maximum-Point-onProfits-Revenues-Curve Published August 14, 2012. 11.The Air Tran Story: An Important Link to the Future of Southwest Airlines, Completed June 27, 2012 (to be published). http://www.scribd.com/doc/102832984/The-Air-Tran-Story-The-Merger-andMaximum-Point-on-Profits-Revenues-Graph Published August 14, 2012. 12.Annies Inc. A Single-Product Company Analyzed using a New Methodology, http://www.scribd.com/doc/98652561/Annie-s-Inc-A-SinglePage 42 of 48

Product-Company-Analyzed-Using-a-New-Methodology Published June 29, 2012 13.Google Inc. A Lovable One-Trick Pony Another Single-product Company Analyzed using the New Methodology. http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology, Published July 1, 2012. 14.GT Advanced Technologies, Inc. Analysis of Recent Financial Data, Completed on July 4, 2012. (To be published). 15.Disappearing Brands: Research in Motion Limited. An Interesting type of Maximum Point on the Profits-Revenues Graph http://www.scribd.com/doc/99181402/Research-in-Motion-RIM-Limited-WillDisappear-in-2013 Published July 5, 2012. 16.Kia Motor Company: A Disappearing Brand http://www.scribd.com/doc/99333764/Kia-Motor-Company-A-DisppearingBrand, Published July 6, 2012. 17.The Perfect Apple-II: Taking A Second Bite: A Simple Methodology for Revenues Predictions (Completed July 8, 2012, To be Published) http://www.scribd.com/doc/101503988/The-Perfect-Apple-II, Published July 30, 2012. 18.http://www.scribd.com/doc/101062823/A-Fresh-Look-at-Microsoft-After-itsHistoric-Quarterly-Loss Microsoft after the quarterly loss, Published July 25, 2012. 19.http://www.scribd.com/doc/101518117/A-Second-Look-at-Microsoft-After-theHistoric-Quarterly-Loss , Published July 30, 2012. 20.http://www.scribd.com/doc/103265909/A-Brief-Analysis-of-Groupon-s-ProfitsRevenues-Data Published August 19, 2012. 21.http://www.scribd.com/doc/103027366/Groupon-Analysis-of-ProfitsRevenues-Data-and-its-Business-Model Published August 16, 2012. More detailed analysis including discussion of the idea of a work function. 22.http://www.scribd.com/doc/103369016/Analysis-of-Zynga-s-Profits-RevenuesData-Maximum-point-on-the-profits-revenues-curve Published August 20, 2012.
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General Motors Financial Data 23.http://www.scribd.com/doc/103600274/The-New-GM-A-Brief-Analysis-of-theProfits-Revenues-Data-through-1Q2011, Published May 9, 2011 and again on August 22, 2012, Discussion of the new GM data from 1Q2010 to 1Q2011. 24.http://www.scribd.com/doc/103607023/Why-Can-t-General-Motors-be-morelike-Microsoft-The-new-GM-may-just-be Published August 22, 2012. 25.http://www.scribd.com/doc/103938349/GM-Before-the-Bankruptcy-MaximumPoint-on-Profits-Revenue-Graph GM Before the Bankruptcy: Maximum point on the profits-revenues graph, Published August 25, 2012. ****************************************************************** The Unemployment Problem: Evidence for a Universal value of h in the unemployment law. 26.http://www.scribd.com/doc/100984613/Further-Empirical-Evidence-for-theUniversal-Constant-h-and-the-Economic-Work-Function-Analysis-ofHistorical-Unemployment-data-for-Japan-1953-2011 Single universal value of h for US, Canada and Japan in the unemployment law y = hx + c, Published July 24, 2012. 27.http://www.scribd.com/doc/100939758/An-Economy-Under-StressPreliminary-Analysis-of-Historical-Unemployment-Data-for-Japan, Published July 24, 2012. 28.http://www.scribd.com/doc/100910302/Further-Evidence-for-a-UniversalConstant-h-and-the-Economic-Work-Function-Analysis-of-US-1941-2011-andCanadian-1976-2011-Unemployment-Data Published July 24, 2012. 29.http://www.scribd.com/doc/100720086/A-Second-Look-at-Australian-2012Unemployment-Data, Published July 22, 2012. 30.http://www.scribd.com/doc/100500017/A-First-Look-at-AustralianUnemployment-Statistics-A-New-Methodology-for-Analyzing-UnemploymentData , Published July 19, 2012. 31.http://www.scribd.com/doc/99857981/The-Highest-US-Unemployment-RatesObama-years-compared-with-historic-highs-in-Unemployment-levels , Published July 12, 2012. 32.http://www.scribd.com/doc/99647215/The-US-Unemployment-Rate-Whathappened-in-the-Obama-years , Published July 10, 2012.
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**************************************************************** Traffic-fatality and Teen pregnancy problem 33.http://www.scribd.com/doc/101982715/Does-Speed-Kill-Forgotten-USHighway-Deaths-in-1950s-and-1960s Published August 4, 2012. 34.http://www.scribd.com/doc/101983375/Effect-of-Speed-Limits-on-FatalitiesTexas-Proofing-of-Vehciles Published August 4, 2012. 35.http://www.scribd.com/doc/101828233/The-US-Teenage-Pregnancy-Rates-1 Published August 2, 2012. 36.http://www.scribd.com/doc/102384514/A-Second-Look-at-the-US-TeenagePregnancy-Rates-Evidence-for-a-Predominant-Natural-Law Published August 8, 2012. Government and National Debt 37.http://www.scribd.com/doc/104663110/The-United-States-Postal-Service-ATest-Case-to-Understand-the-US-Government-Inefficiencies-and-Budget-CutsAhead United States Postal Service: A Test case for government inefficiencies, Published Sep 2, 2012. 38.http://www.scribd.com/doc/104833993/Are-You-Better-Off-Than-You-WereFour-Years-Ago Published Sep 4, 2012. Briefly highlights the slowing down the debt growth rate as we cross the $16 T mark. The national debt could have been as high as $19.5T on August 30, 2012 if the high rate at the end of the Bush presidency had continued. 39.http://www.scribd.com/doc/104803209/The-Rate-of-Growth-of-the-NationalDebt-The-Obama-versus-the-Bush-years Published Sep 3, 2012. The importance of the debt growth rate h = dD/dt, as opposed to the debt level D, is emphasized. The significance of the debt growth rate does not seem to have been recognized, at least in the popular discussion. 40.http://www.scribd.com/doc/104677653/The-US-National-Debt-Brief-HistoryGood-News-The-Rate-of-Growth-of-the-Debt-is-Slowing-Down , Published Sep 1, 2012. Brief summary of the historical debt data starting with President George Washington with attention being drawn to the recent slowing down of the debt growth rate. The importance of the debt growth rate, as opposed to debt
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levels, does not seem to have been recognized, at least in the popular discussion. 41.http://www.scribd.com/doc/104659108/The-US-National-Debt-and-the-LongTerm, first published on June 17, 2011, and republished Sep 1, 2012. 42.http://www.scribd.com/doc/104659448/The-US-National-Debt-RetirementProgram, first published on June 23, 2011, before the debt default crisis which led to lowering of the US rating, republished Sep 1, 2012. 43.http://www.scribd.com/doc/104662291/A-Radical-Proposal-to-PermanentlyReduce-the-Unemployment-Rate, first published on October 13, 2011, republished Sep 1, 2012. 44.http://www.scribd.com/doc/104661297/Is-Taxing-the-Rich-an-Option-forBudget-Deficit-Reduction, first published on July 3, 2011, republished Sep 1, 2012.

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About the author V. Laxmanan, Sc. D.

Email: vlaxmanan@hotmail.com The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the ground-based experiments and in the space shuttle experiments. More recently, he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by
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Planck, referred to here as the generalized power-exponential law, might actually have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law, as we see here, and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton.

Cover page of AirTran 2000 Annual

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