I’ve said it before and I’ll say it again: economics is a part of my knowledge area that is very dark.
What I want to see debated is whether the debt of the United States should be a concern or not, and to what extent. There are two extremes I see commonly expressed. One which I associate with the left is that the debt will get eventually grow so big that it will lead to the dissolution of the United States as a world power. The other extreme, which I associate with the right, says that the debt isn’t a problem and we can keep pilling it on with little or no consequences, especially if our economy continues to grow.
I’m sure the truth is somewhere between these two.
Now, the facts as I can Wiki/Google them is that the total debt of the U.S. is ~9 trillion dollars. The GDP is ~13 trillion. We have a debt-to-GDP ratio of 64.7%.
Here is a list of countries by their debt-to-GDP ratios. I found it very interesting. We have some familiar friends around us – France, Germany, and Canada. The Nordic countries are hanging around in the 40s/upper 30s, along with the UK. Australia, Russia, and Mexico have (to me anyway) surprisingly low numbers.
But these are just raw numbers. I’m sure it’s more situational –- maybe for one country at a particular time having an 90% figure is just fine and dandy whereas another country at 50% could be doom and gloom. Or maybe not –- I have no context.
The problem I see with the “we can grow our way out of it” philosophy if that we’re not growing enough. We’ve stacked on about three trillion after over the past 7 years but we haven’t grown our GDP by a comparable amount. Our growth rate per year is about 4%. That doesn’t cut it, does it?
Should we try to reduce our debt to the 40s and 30s? Or are we just fine and dandy? What would happen if we were like Japan and at 120%?
Two important distinctions: (1) stocks and flows (2) levels and growth rates.
The amount of debt is a stock. GDP is a flow - the annual addition to a stock. Debt to GDP is really a rough indication of how vulnerable your capacity to service the debt without significant disruption is should there be a change in economic conditions. The amount of US debt compared to the total worth of the US economy over a long time is small. So the level of US debt is not a problem.
But the stock of debt can’t grow a lot faster than GDP for a long time. Somewhere - we don’t know where - it becomes a problem. And somewhere before there enough people will get nervous enough that raising debt becomes expensive. Government debt is after all future taxation unless there is default. The high growth in US debt will have to be curbed at some time. This will be done by increased taxes, decreased spending, inflation or default. All of these are politically difficult and potentially disruptive to the economy. If they have to be done in an unhappy economic environment there will be substantial dislocation. Part of the reason that some countries have negligible debt or even negative debt is that they anticipate large increases in structural deficits due to population aging and wish to plan for them to avoid difficult choices in the future.
Debt is fine, harmless in itself. But if gets on an unsustainable path it can be costly to get it back to a sustainable path. Additions to debt at the levels we’re talking about are not really a problem either. But remember: debt is future taxation. It is OK to impose future taxation if future generations are going to share in the benefits of current government activity - if, for example, the debt is used to finance long-lived infrastructure or something else which will enhance the long-term productive capacity of the economy. Boondoggles or parties for certain groups of current taxpayers? Less good.
We shouldn’t be unconcerned, but debt isn’t likely to destroy a country completely.
Several major world powers (many of the European ones) have gone bankrupt multiple times in their histories, and while it caused some pretty serious problems at the time, they ended up keeping on keeping on.
IIRC in the late 1500s/early 1600s (my years may be widely off) the Spanish had failed to pay their debts so many times that they were unable to secure loans when they desperately needed them to finance wars.
About 45% of the ~$9 trillion debt is intragovernmental, meaning it isn’t money that the government owes to creditors with U.S. Debt Instruments, but rather money for pension plans and et cetera.
If the U.S. were to default on its debt it’d have wide-reaching negative effects not only for Americans, but for the bankers around the world who stockpile U.S. debt instruments because in general the U.S. government is considered to be a pretty “sure thing.”
Well, the worst potential outcomes I’ve heard doesn’t include the U.S. disappearing. We’d still exist but we couldn’t spend 400 billion dollars a year on the military. The Euro would supplant the dollar. We’d still be a big nation with a lot of resources but you know, we’d be done as the hyper power we are now…we’d be like Russia or Germany or some such.
That’s sorta what I’m talking about, I think. Isn’t that when Spain transitioned from being a major world power that could seriously threaten Britain into its long slide into its present state where it’s more or less a joke?
But OK, so let’s say the debt isn’t that big of a deal. Why then, in the past, were the Republicans so critical of the Dems for being big spenders? And then why is it that these same people throw a hissy fit when Bush and the former Republican Congress spend, as the phrase goes, “like drunken sailors”? What’s the big deal?
How big could our debt get before you think we need to start seriously considering tightening the purse strings?
Depends on the size of the country, its manufacturing/income base, and other factors. Some of the third world countries currently drowning in debt may become basically untenable without relief; even if they seek the protection of bankruptcy there’s nothing to carry them out the other side, like with the European countries you mentioned.
One thing to consider is that the debt-to-GDP ratio is just a snapshot. You should also take a look at the situation over time. Is the debt-to-GDP ratio increasing, decreasing, or staying the same?
For example, take a look at this web-page from the federal government of Canada, which indicates that Canada’s total government debt (federal/provincial/territorial), as percentage of GDP, is dropping steadily: Canada’s Fiscal Progress. The federal government has posted eight annual surpluses, and most of the provinces have similarly eliminated deficit financing. That means that the various governments of Canada have increased freedom to choose how to allocate spending, compared to about 15 years ago, when a large chunk of government revenues just went to service the debt.
(And I note that the Wiki’s data doesn’t quite match the Canadian federal government’s data: Wiki gives the ratio as 65.4%, but the federal data gives a total of ~ 60% (38.7 (federal) + 22.2 (prov/terr)).)
What is the similar trend for the U.S.? I would guess that all that War on Terror stuff is making the US numbers trend up, not down, but would be interested to see comparative figures.
I don’t think there’s a top limit on the debt a country can go into before its economy collapses. It’s situational, just like the debt of an individual or corporation. AT&T can go into a billion dollars of debt acquiring a rival communications company, for example, and still be a powerful, successful business. Ossis Iron Works where I live will probably fall apart if it goes half a million bucks into debt.
Basically, if your economy is strong, by all means don’t be afraid of debt. American debt is actually a GOOD thing for the most part, because it means that people are investing in the American government.
What is a lot more frightening than debt, however, is trying to run a budget deficit. This is when your bills are higher than your income, and is always a Very Bad Thing. The US government operated under a deficit under the Bush admin right after he took office, which is probably part of the reason that the unemployment rate was so high for so long, among other problems.
Well THAT’S reassuring.