Summary: Each presidential campaign season the federal debt becomes an issue, with the debate consisting largely of bogus soundbites. Each election sees that the federal debt has not only grown, but has grown faster than the US economy — with little to show for it (e.g., our public infrastructure rots). This will not end well for us.
The big picture: the ratio of federal debt to GDP
First insight: massive debts can be paid down with steady growth and moderate inflation (especially easy with long-maturity fixed rate debt), proving that conservatives forecast of certain debt doom are false. Second insight: this trend will cause problems if not stopped (left-wing economists will deny this until the crisis begins).
Focus on events since 1980.
See how the government’s debt to GDP ratio rose under Reagan & Obama.
See America’s steady bipartisan leadership!
Third insight: we’ve lost control of the Federal budget. Keynes said that we should fight recessions with fiscal deficits, with the debt paid off during the following expansion (conservatives lie about Keynes’ advice). Reagan ran the first surge in deficits during an economic expansion, along with Bush Sr. raising debt/GDP by 18 percentage points in 8 years. Obama has done even more, raising it by 23 percentage points in almost 6 years.
Retiring boomers will put even more pressure on the government’s finances. Yet amidst all this spending, Federal spending on infrastructure has fallen from its low levels while our public infrastructure decays (3rd world nations don’t just happen; they’re made by bad policy). Fourth insight: we could be borrowing at almost zero interest to rebuild America — boosting our economy.
#5 is bad news: foreign ownership of US treasuries has skyrocketed.
We no longer “owe it to ourselves”.
#6 is good news: net federal debt is much lower than gross debt.
Net is the Federal debt excluding debt held by government agencies,
such as social security, Federal pension funds, and the Fed.
This is a more useful measure of the federal debt. (Write a billion dollar IOU to yourself. Are you buried in debt?) Reagan and Bush Sr. boosted the net debt/GDP by almost 18% over 10 years. Obama boosted it by almost 14% over 6 years.
With net debt at 60% of GDP, US debt is moderate by international standards. For a more accurate picture of the federal government’s obligation, we need to know its liabilities — debt plus future obligations. Legally-binding ones, like unfunded obligations for pensions (vets and civil service), and non-binding ones (medical care for vets, civil service retirees, the poor and elderly). These are massive, especially the health care obligations, but difficult to calculate.
The federal debt is a serious problem. The deficit is a bleeding sore, as the debt increases in both good times and bad — with future problems guaranteed as the boomers age and interest rates rise (which they will, eventually).
But we find it difficult to see the situation because the left and right lies to us (they believe us to be gullible because we are). We cannot respond effectively to a problem we cannot clearly see. When we respond with anger to lies, then people will treat us as citizens.
For More Information
- We might default on our governments’ debt in the future. Do you know how often we’ve done so in the past?
- Why the U.S. cannot inflate its way out of debt.
- America is rich and powerful because we can borrow. Will this debt build a stronger America?
- America’s strength is an illusion created by foolish borrowing.
- Another way to look at the national debt. More comforting, less scary.
- Cacophony about Social Security shows our real political dysfunctionality.
- Fact & myth about the debt supercycle, a story of modern America.