Understanding the Federal Debt

Current GDP is about $15 trillion, so if you include the government-held debt the real debt-to-GDP ratio is right around 100%. That’s not the highest it’s ever been in the United States. It was 112% after WW2, but that is a measure of the public debt only, so it’s not apples to apples. The full ratio at that time may have been higher than that (I don’t know what the government-held debt was then, but I doubt it was very high; there was no Social Security trust fund at the time to build up such debt, though there may have been other forms of government-held debt that I don’t know about).

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23 comments on this post.
  1. Coises:

    I really want to scream every time I read this sort of thing.

    A few other advanced economies have debt-to-GDP ratios higher than that of the United States. Some of those countries in Europe have recently seen their financing costs rise to the point that they are unable to finance their deficits solely through private markets. But Japan has the highest debt-to-GDP ratio of any advanced economy, and it has continued to be able to finance its debt at extremely low costs.

    The debts of Japan, like those of the United States and Great Britain, are denominated in a fiat currency controlled by that nation. Eurozone countries are in a very different position.
     
    This article from Forbes:
    http://www.forbes.com/sites/pascalemmanuelgobry/2012/10/19/no-the-united-states-will-not-go-into-a-debt-crisis-not-now-not-ever/
    explains the matter clearly.
     
    Neither the Federal debt, nor the deficit, as numbers, should concern anyone. Aside from creating self-inflicted political crises, they serve no useful purpose at all.
     
    Taxes matter. Spending matters. These have real effects on real people, and on the economy; but the good or ill of each one lies in the details and the context. Boiling them down to a single number throws away all the relevant information.
     
    By the way… going by the Preview, HTML A-tags in comments are behaving very strangely… as if they’re being styled with a float of some sort. It also seems to be impossible to create a normal break between paragraphs with two successive line returns, though using an   on the blank line works, at least in the preview.

  2. Dr X:

    The $787 billion stimulus package was advocated for and signed by Obama, so at least that portion of the debt can be put on his plate.

    In and of itself, even this is difficult to say. If, as some (many?) economists believe, the stimulus halted an economic free fall, that 787bn may have headed off a far worse revenue decline. In the Great Depression, unemployment reached over 25% at its peak. You think our the 2008 crisis put a dent in revenue? My point is, economic activity is dynamic. That $787bn didn’t get buried in hole.

  3. lclane2:

    I suspect that “reducing the national debt” is code for “reducing benefits to the poor.” Republican policy is largely increasing wealth of the wealthy. Beyond some level, perhaps already exceeded, extracting wealth from the poor becomes a drag on the overall economy.

  4. raven:

    The Bush tax cuts along with the Bush Great Recession gave Obama very little room to maneuvar.

    You can’t raise taxes or cut spending during a recession without making it worse. This is straight Keynesian economics.

    Obama may well have kept the Great Recession from turning into the Second Great Depression.

  5. iangould:

    America is currently not in recession and hasn’t been a for a couple of years.

    Now is the time to start thinking about tax increases and spending cuts – especially ones that won’t kick in for a year or two.

  6. Rob:

    How much of the $787B was spent on bailouts like GM and AIG where Treasury has been able to quit those positions at a small prophet?

  7. Dr X:

    America is currently not in recession and hasn’t been a for a couple of years.

    Now is the time to start thinking about tax increases and spending cuts – especially ones that won’t kick in for a year or two.

    Our unemployment is still high. There are good arguments for more stimulus and focus on long-term rather than short-term deficits. The US problem in the long term is due to future obligations associated with the soaring cost of healthcare in the U.S. OMB says that Obamacare will offset some of that, but sane policy will require that we raise taxes down the road. Doing so now is a bad idea, especially on anything less than the top incomes.

  8. dingojack:

    Just as a point of perspective, here is a graph of the UK National Debt vs GDP since 1692. Note the periods c1750 to c1860 and c1925 to c1955.
    Funnily enough there were no ‘dogs & cats living together, mass panic or economic collapse.
    Hmmm…. perhaps the sky isn’t falling.
    Dingo

  9. iangould:

    Doc, assuming no more “Black Swans”, the US probably has several years of growth ahead of it, maybe more.

    That being the case, you need to start to consider when it’s appropriate to withdraw some of the current stimulus.

    Restoring the payroll tax to its previous level and limiting extended federal unemployment benefits to a single year is probably appropriate at this stage.

    Most of the work in fixing the long term debt problem will be done by economic growth which lifts revenue and reduces welfare payments (because more people are in work). But overall spending restraint and most increases in tax rates for the rich are going to be needed too,

    As a quick example, I would have suggested indexing the maximum level of income subject to the payroll tax to growth in real wages. This would have limited immediate impact but in the longer term would contribute significantly to the sustainabiliy of Social Security.

  10. dingojack:

    I guess Western Australia should hold off exporting these to the US then?
    ;) Dingo
    ———-
    Awwww!!

  11. Ed Brayton:

    Rob wrote:

    How much of the $787B was spent on bailouts like GM and AIG where Treasury has been able to quit those positions at a small prophet?

    None. Those were done in entirely separate bills.

  12. Patrick from Michigan (Yes, that one!):

    Ed,

    I have a question. I am Independent, always have been. But, I tend to lean more towards Paleoconservative. Do you believe that ripping out the free-trade agreements and imposing tariffs on imports would help?

    I think it would.

    If you don’t, please explain why not.

    Thanks,

    -Patrick

  13. dingojack:

    Patrick – such an action could be inflationary. If you slap tariffs on foreign goods there’s no guarantee that domestic manufacturing could keep up with demand. This would lead to supply-side shocks, driving up prices, which in turn would drive up wages and so on and so forth.*
    Dingo
    ——-
    * not an economist

  14. nakarti:

    Pat, I agree with you for similar reasons and down in Wisconsin we call that ‘progressive’

    Yes it would kick inflation way up on consumer goods that we mostly import from other countries but not so on foods and I suspect if such a move were made, fuel would be excluded. Perhaps we would benefit more than you think from such a price rebalancing.

  15. jdrs0819:

    A government that issues and owns its own currency cannot go bankrupt. When does spending then becomes a problem? That would be when we experience much higher inflationary pressure…which given the rest of the world’s shitty economic predicament, the fact that interest rates are at a record low, and we owe OURSELVES most of the debt that’s been issued, who knows when that will happen. If you want to include liabilities as noted above, and compare it to corporate culture, also take note that a corporation that sought expansion would jump at the chance to have access to the interest rates we currently have. What’s the point of lowering interest rates if we don’t take advantage? Plow that money into infrastructure, education, research, and climate change mitigation. Only guillable moralists are concerned with the debt and deficits in the context of the United States.

    What I also know is that no sane person would try to “fix” a problem 30 years out when it might not even be a problem by then (aside from climate change which is more of a certainty than trying to tie future Congress’s hands); given the history of the “Fix the Debt” crowd, I’d say we have a pretty good track record of being just fine if we did nothing (especially on Social Security). Speaking of trying to tie future Congress’s hands, why haven’t people realized that the 114th can undo the 113th, and so on? This entire “Fiscal Cliff” should be evidence of that fact. Congress can undo what they previously did. Imagine that. However, changes to entitlements are rarely undone, just as new spending programs like the ACA are rarely undone. So as you can see, raising my retirement age to pay for Ronnie’s tax cuts isn’t something I’m going to be fond of when it’s not even clear there is a problem to be fixed (other than the health care system as a whole).

    Call me crazy, but I don’t want to do what Bill Clinton did: create a giant pot of money for the GOP to steal with tax cuts, wars, and corporate welfare. If you’re a conservative, then fine, try and cut programs. I’m not a conservative. My goal is to create hippy dippy liberal programs that are hard to undo.

  16. dingojack:

    “Call me crazy, but I don’t want to do what Bill Clinton did: create a giant pot of money for the GOP to steal with tax cuts, wars, and corporate welfare.”

    OK, you’re crazy.
    You know how you smooth the boom/bust cycle? Save when the going is good, spend when the bubble bursts. But I guess partisan gains are more important than economic sense.
    Dingo

  17. Coises:

    You know how you smooth the boom/bust cycle? Save when the going is good, spend when the bubble bursts.
    — dingojack

    That’s part of it, which the “automatic stabilizers” built into most modern economic regimes, including that of the United States, already do. (See Krugman:
    http://krugman.blogs.nytimes.com/2012/12/29/on-the-economics-and-politics-of-deficits/
    for a synopsis as applied to the present US deficit.)
     
    There’s another way to scale back the boom/bust cycle, though, that we are almost entirely ignoring thus far: drastically reduce the size and freedom of action of the FIRE sector. Those folks (Finance, Insurance and Real Estate) are drivers of instability, and when they don’t drive it, they magnify it. We don’t need that sector to be nearly so large, and the world would be far better off with far less of it.

  18. dingojack:

    Sorry, I didn’t find the article that useful – it’s thrust seemed to be:
    Hypothetically someone might shoot a second term Republican President. Look at what happened to Abe Lincoln. Therefore, all Republicans should only serve one term, evar, QED.

    Not a very deep analysis really*.

    Dingo
    ——–
    * Also ‘Lies of Our Times: all the news that’s fit to invent’, really?

  19. Coises:

    Do you believe that ripping out the free-trade agreements and imposing tariffs on imports would help?
    — Patrick from Michigan

    The problem with free trade agreements is that they engender a race to the bottom. The theory of free trade builds on the notion that all trading partners benefit when each can concentrate on its most efficient activities.
     
    In the real world, though, jobs move to the developing nations not because their labor forces are more efficient (they aren’t), but because capital is able to exploit labor there more efficiently, without the hindrance of standards and regulations for which workers in Europe and the United States fought bitterly, sometimes with their lives, in the nineteenth and twentieth centuries.
     
    Democracy and capitalism are somewhat at odds, since the former regards each person as equal in value and rights, while the latter confers power in accordance with wealth. Over the past forty years there has been a world-wide shift toward giving capitalism more control and democracy less, free trade agreements being one instrument of that change.
     
    We are seeing the fruits of that rebalancing all around us, and they are a bitter harvest.

  20. Coises:

    Sorry, I didn’t find the article that useful — dingojack

    Ah. I see I was too quick on the draw… I thought I remembered what Professor Krugman wrote there, but now that I actually re-read it… it wasn’t on point.
     
    I don’t have the reference I wanted, then, but as a band-aid, I’ll give you Wikipedia:
    http://en.wikipedia.org/wiki/Automatic_stabilizers
    on automatic stabilizers.
     
    My (first) point was just that modern economies do pretty much what you described—“Save when the going is good, spend when the bubble bursts.”—as a direct result of the way their taxes and benefit programs are structured… the “pretty much” being that they don’t necessarily go fully into surplus in boom times (nor is there any reason they should).

  21. Nick Gotts (formerly KG):

    Do you believe that ripping out the free-trade agreements and imposing tariffs on imports would help?

    I think it would. – Patrick from Michigan

    Of course, there’s no possibility other countries would retaliate, is there?

    I agree with Coises about the bad effects of free trade agreements over the past few decades, but the remedy is international agreement, particularly reform of the WTO, to safeguard workers’ rights and protect the environment everywhere, not unilateral actions that could spark the kind of trade war we saw in the 1930s.

  22. Reginald Selkirk:

    Deprogramming Progressives Indoctrinated into Supporting Austerity

  23. freemage:

    Nick and Patrick: A possible compromise might be to replace “free trade” with “fair trade”–you get a tariff based on how well your nation deals with worker’s rights and environmental issues, compared to the U.S. For some nations, this might need to be phased in slowly, to give them time to come ‘up to code’, and not thrust too great a financial shock into the system all at once. (For instance, I suspect China might need a full decade to be even close to our system on environmental issues, even as horrible as we are in some ways, so it might need some of that time to re-calibrate without facing inordinate tariffs, save as a stick to ensure compliance.)

    So, once a nation has comparable standards to ours, we would no longer assess any sort of tariff on their goods. (Note: Wiser heads than mine would need to assess “comparable standards”–FREX, in many nations right now, the standard of living is remarkably cheap by American standards; if the goal is for workers who can be self-sufficient, it might be adequate merely to make sure the baseline salary is comparable to the American minimum wage on that score. Also note: The U.S. minimum wage is horribly low right now, and needs to be increased.) Of course, by that point, much of the corporate advantage of shifting manufacturing to those countries would also be gone.

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