Readers Question: I’m a bit perplexed by US Debt figures
There are different ways of measuring US National debt.
Firstly, there is the actual value of debt. This shows that (even adjusted for inflation) the value of debt has increased significantly over the years
- In 1900, US debt was $43.6bn (2005 prices)
- In 1945, US debt was $2347.41 bn (2005 prices)
- In 2010, US debt was $12032.28 bn (2005 prices)
Though there were a few periods in the 1920s, 1950s and 1960s when the real value of debt was actually being reduced.
from: wikipedia US Debt
The Public debt is the US debt held by private sector.
Gross debt includes debt that the government holds itself.
Real GDP as % of GDP
The most useful way for historical comparisons is the level of national debt to GDP.
The level of debt to GDP is important for influencing whether the debt will be affordable.
For example, if debt increases by 2% a year, but GDP increases 2% a year. Then the debt to GDP ratio will stay the same.
(if we assume interest rates stay constant), then the government will spend the same % of national income on paying interest and repaying debt. The government can meet interest payments on debt without increasing tax rates.
However, if debt to GDP ratio was to double, the government would have to spend a higher % of income on servicing the debt. The government may have to increase tax rates to meet the interest payments.
Readers Question: The strangest thing that I find about the data is that in the ten years leading up to the Great Depression we were diligently paying down our debt, giving merit to his claim that we cannot pay our debt down without our monetary base shrinking and causing a recession/depression.
The debt was being payed in the 1920s because the economy was expanding. In a period of economic growth, the government will automatically receive more tax revenues (people pay more income tax and expenditure tax). Therefore, the government will receive more tax and it needs to spend less on unemployment benefits. Therefore, the government should be reducing its borrowing during a boom period like the 1920s.
The recession was not caused by reducing the value of the debt. See: causes of great depression
In the 1930s, debt increased significantly. This increase in debt was caused by the great depression (tax receipts fell, government spending increased).
In a recession, with a rise in private sectors saving, it is essential the government spend more. The government can borrow without causing crowding out because the private sectors want to save and buy government bonds. If anything, US should have borrowed more in the 1930s and provided greater fiscal stimulus to reduce the mass unemployment and continued recession.
In the 1950s and 1960s, a long period of economic expansion enabled debt to fall.
In recent years, US debt has increased sharply because
- tax cuts
- Recession of 2008 / 09
- financial crisis
- rise in entitlement spending (health care)
- See: why US has a budget deficit
It is unfortunate US debt was rising in the lead up to the recession. In this period of growth, the government should have been seeking to reduce deficit (not cut tax). However, when the recession hit the US it was the correct thing to borrow more.
Interest Rates and Borrowing
In a recession, the private sector don’t want to spend and invest as much. They tend to have a preference for ‘safe’ investments like government bonds. This increase in demand for government bonds leads to lower interest rates. The fact that interest rates have fallen on US bonds, shows the market currently has a strong appetite for buying US bonds. Therefore in a recession, and liquidity trap, it is usual for government to borrow more.
In 2009, the US actually spent less on financing the debt because of lower interest rates. Cost of interest payments fell from $454 to $381 a year.
This is still a big % of US government spending (debt interest payments were 5% of total federal spending – 4th biggest component of federal spending) However, 5% of spending shows that it is not currently unmanageable to meet interest payments.
This is only part of the explanations behind US debt. There are many other issues, that need exploration.