Since coming back to the US, I have been surprised how often the national debt comes up in conversations about most any political topic. In discussions about inequality, for instance, I hear that we can hardly trust the government to address inequality given its own financial incompetence, and that if there is financial injustice about, surely the greatest injustice is the government’s systematic stealing from our children and grandchildren, whom we are saddling with an intolerable burden of debt. The theme of the travesty and looming catastrophe of US government debt has fueled the rise of the Tea Party, and played a role in the ridiculous fiscal standoffs in Congress over the past couple years. Of course, it is an important fiscal concern that both parties should be attentive to, but this is not usually how one hears it discussed—i.e., in the context of particular policies for fiscal responsibility. Rather, it is used as a universal putdown—a way of claiming, no matter what the particular point is under discussion, that the government cannot be trusted because its debt is both irresponsible and immoral, and that only a radical overhaul (one might almost say “overthrow” from some of the rhetoric) of our government can save us from imminent disaster.
As someone who used to be something of a national debt alarmist myself, I thought it might be helpful to put the issue in the proper context. The following is an expanded form of a little explanation I gave to a friend on the question after a political discussion last week.
1) Use real numbers
For one thing, inflation is generally ignored. All you have to do is yell out $16 trillion—an obviously immense sum—and point proven, right? “Over the last forty years, the debt has risen from $500 billion to $16 trillion—our debt is spiraling out of control.” Adjust for inflation, though, and it’s only risen from $2.4 trillion to $16.8 trillion. Obviously, however, that’s still a pretty substantial increase. That’s why it’s important to:
2) Use percentage-of-GDP numbers
This really should be pretty obvious. A household that earns $50,000 a year but has a $100,000 debt is in a lot worse shape than a household that earns $200,000 a year but has the same debt. GDP is analogous in one sense, designating the total economic production of a country. Of course, it’s also not quite analogous, because 100% of a country’s GDP can’t go to the government (excluding communism, that is); even in the most extreme cases, such as Sweden, only a bit over 50% does. But as a way of measuring the burden of a debt relative to a country’s likely ability to repay it, debt-to-GDP is a good ratio to track over time. Using this ratio, we find that over the last forty years, the debt burden has not risen 32-fold or even 7-fold, but has a little more than tripled, from 31% of GDP to 99% of GDP. See this chart:
Of course, that is still a fairly substantial rise, but looking at things this way still puts things in a much less apocalyptic light. Why? Because:
3) The debt burden has risen and fallen over time.
After WWII, national debt rose over 120% of GDP, but was paid down quickly by high growth and high taxes. It rose again substantially under Reagan and Bush I to 63% of GDP, but was then paid down a good deal under Clinton to 54%. All of this was done without some radical restructuring of the government. All it took was sensible tax policy, good economic growth, and a modicum of fiscal responsibility. Current debt levels are not yet, by historic standards, out of control, and if politicians in Washington can agree to simple, common-sense measures, there is every reason to believe that they can be brought back down substantially again.
4) It’s not the Democrats’ fault.
Something else that jumps out at one from the chart above is how, since the resignation of Richard Nixon, increases in the debt have tended to coincide with Republican presidencies, and decreases with Democrat presidencies. The exception has been Obama’s presidency, though the vast majority of the increase there took place in the apocalyptic year of 2009, when the Great Recession crushed tax receipts and raised expenditures immensely. This points to the important fact that
5) Deficits are decreasing.
Most Americans are shocked to hear that government deficits have been falling like a rock in recent years. This is partly due to a stream of misinformation flowing from the Right, partly due to simple confusion between debt and deficit (which is the amount that outlays exceed revenue, and thus that debt increases, each year). The deficit for 2014 is projected at only 2.8% of GDP, which would be under the 40-year average of 3.1%/yr. Indeed, the chart above shows that, far from being an ever-worsening problem, the debt has fluctuated within very manageable parameters with the exception of 2008-09. Barring another major crisis, basic fiscal responsibility should suffice to bring it back to such manageable parameters. This is particularly clear if we look at the last 14 years, which saw the debt rise slowly, then explode suddenly during the crisis of the Great Recession, as you would expect during a crisis, and then begin to level off.
But still, it has an awful long way to go down now, right? Well, not necessarily. Because
6) It doesn’t all have to be paid off.
One false assumption about the debt is that we’re sitting here with $17 trillion that we need to find a way to pay down to zero or else we’re toast. Often we hear folks lamenting how “our children and grandchildren are being saddled with this unpayable debt,” as if somehow, in 2050 or whatever, it will all come due and there’ll be no more procrastinating. Well, not really. Sure, it would be nice to be completely debt-free as a nation; indeed, it would be even nicer to be like Abu Dhabi or Norway and have a handsome surplus lying around. But most nations don’t have that luxury, and that’s OK. For an individual or household, it’s always good advice to try to get debt-free as soon as possible. Why? Well because as long as you’re in debt, you’re very vulnerable to any sudden shocks—a health crisis, losing your job, your house burning down, etc. Such shocks can double your expenses or halve your income all in one fell swoop, leaving you unable to pay even the interest on your debt, and thus at the mercy of the creditor. Nations, however, like large companies, are large enough entities that they are somewhat cushioned against such shocks (not to mention that, with central banks, they have a fair bit of power, if necessary, to control the interest rates they have to pay, so as to remain solvent in the midst of such shocks). To be sure, they still happen and can be quite expensive, as the Great Recession showed, and for this reason, it is advisable to keep one’s debt burden relatively small as a percentage of GDP (say, under 50%). But if the debt is being used to finance growth, it may not be a bad idea. That is to say, if the interest you’re paying on the debt is less than the return you’re making on it, the debt isn’t a problem. This is why many prosperous companies that could, if they wanted to, pay off all their debt, don’t. (Of course, this is the same logic that many households used to continue refinancing their homes in the housing boom. It’s important to realize that this logic was not fundamentally unsound; the problem rather was that (a) more often than not, the debt was being used to finance consumption, rather than growth; (b) inasmuch as it was being used to finance growth, in the form of more housing investment, this was largely illusory growth; (c) an individual household is usually very unwise to take such risk, given how completely a single financial shock can alter the whole picture.) So if, for instance, the interest on the debt is 2% of GDP, but the economy (and thus the tax base) is growing at 3%, then over the long run, all things being equal, the debt will become more manageable. (Of course, “all things being equal” assumes that federal expenditures are not rising rapidly, which most people assume that they are. In point of fact, though, with the exception of the crisis years 2009-11, expenditures have remained fairly steady around 35% of GDP over the past 30 years, and are expected to remain in that range going forward.) The key, then, is to keep interest lower than growth. (Which, according to some leading economists at least, means our best bet is to incur more debt in the short term to boost growth in the long term.)
In fact, in 2013, total interest payments were 2.4% of GDP, compared to GDP growth of 4.1%; indeed, interest payments have been less than GDP growth quite regularly in recent years. To be sure, interest rates are likely to rise somewhat in coming years, raising total interest payments toward the neighborhood of 4%, so complacency certainly isn’t in order. But neither is panic.
7) We are the arbiters of our own fate (interest rates)
One important difference between the national debt and private debt is that a nation has a good deal of control over the interest rate it has to pay, and so, if all goes well, can keep interest payments below the rate of economic growth. This is not just because of a central bank that has some control over interest rates, but because normally, the main lender to a government is the people. It’s like a debt that we owe to ourselves, then, or perhaps a bit less optimistically, like a debt you owe to your brother-in-law for helping finance the family business. This is why, for instance, the immense debt burden following WWII wasn’t much of a problem. Almost all of those debts were owed to American bondholders, who had bought bonds for largely patriotic, rather than financial, reasons, and thus didn’t demand very high interest rates. What this means is, somewhat paradoxically (though this is really how all debt tends to work), the debt isn’t much of a problem unless we think of it as such. That is, if we as the American people have confidence in our government’s ability to manage the debt, and hence keep extending credit, then the debt should be readily serviceable. But if we don’t, well then it won’t.
Of course, the complication here is that, nowadays, a substantial portion of the national debt is owed to other countries—“our nation is owned by China,” we often hear the alarmists say. This problem is, however, routinely exaggerated. In point of fact, about 1/3 of the national debt is owed to foreign creditors, with about 7.5% of that going to our largest creditor, China (only slightly above one of our staunchest allies, Japan). Indeed, the substantial majority of this 1/3 is owed to reliable allies.
8) We are the arbiters of our own fate (taxation)
But there’s another, at least as important, sense in which the severity of the national debt depends largely on perception. After all, how does the government pay the debt? Well, with tax money. And who does it collect tax money from? Well, us. Of course, there’s some limit to how much tax money a government can collect without destroying the economy, but given the historically low top marginal income tax rates, it’s difficult to argue that we’re close to that point now. Within the fairly broad parameters of economically feasible taxation, then, a nation’s ability to service its debt (and to avoid incurring more debt) is largely dependent on the people’s willingness to continue supporting their government with tax money. The combination of this point and the previous point mean that some countries, like Japan, are able to shoulder immense debt burdens—240% of GDP in Japan’s case, and in a very low-growth economy, mind you—without any imminent fear of insolvency. This is because Japanese culture, quite to the contrary of American, is characterized by immense trust of authority and a sense of public duty to financially support the nation. Now, this is not a little sermonette about how we should all be more like Japan—clearly there are benefits to the American suspicion of authorities—but it does mean that it’s more than a little disingenuous when demagogues on the Right declare that we shouldn’t pay a penny more in taxes because our government can’t be trusted with money, because it’s debt problem is out of control. The response to this, by exasperated commentators on the left, is that the only reason there’s a debt problem in the first place is the unwillingness to pay a penny more in taxes. Of course, that position is a little naive as well, but the point is that ultimately, the national debt is essentially a political problem, not a strictly financial problem. That is to say, the difficulty with the national debt has little to do with the numbers themselves (as they stand at present), and almost everything to do with political attitudes toward it, toward expenditures, and toward taxation. The Left needs to take some of the blame here for stubbornly shielding certain programs from any deficit reduction measures, but the Right needs to take a good chunk of the blame for fostering a culture of tax revolt and general distrust, since this creates a self-fulfilling prophecy of a spiraling debt problem, which is then deceptively used as more fodder to foster that culture of distrust.
Don’t get me wrong, then. There’s plenty to worry about, and I’m certainly no optimist about the future of American solvency or hegemony. Moreover, while the numbers don’t look too bad on current parameters, a few small changes—say, growth decreasing by 1%, interest rates rising by 1%, tax tolerance declining further, and current expenditures jumping unexpectedly a few percent higher—could result in a pretty serious debt situation pretty quick. So it would certainly behoove us to take debt-reduction measures as soon as practicable. But this should be undertaken in a climate of sober political give-and-take, not an climate of manufactured hysteria and distrust; nor should the national debt be used as an excuse for derailing any other policy debate, as seems to be an increasingly frequent habit on the Right.
Some sources used herein: