Reality Check – Are We Really Drowning in Debt?

In the prior Reality Check, I promised to discuss the potentially worrying trend lines in our national debt, the differences between the government and the family budget, and the reasons why balancing the budget and eliminating the debt is a political fantasy. This week we will deal first of these items – the seemingly alarming increase in national debt since 2000.

Let’s start with the graph that is used to scare us all – the recent growth of our national debt:

//research.stlouisfed.org/fred2/graph/graph-landing.php?g=3LHF

As you can see, the tripling of federal debt from $5.8 trillion in 2000 nearly $19 trillion in 2015 sure makes it look like our debt is spiraling out of control. But, as we noted in our prior Reality Check, the important number is not so much the actual amount of debt but its relationship to GDP, with economists usually getting concerned with ratios over 60 or 70 percent. Now, GDP has actually increased by $7 trillion dollars since 2000:

//research.stlouisfed.org/fred2/graph/graph-landing.php?g=3NJG

So let’s look at that critical debt-to-GDP percentage:

//research.stlouisfed.org/fred2/graph/graph-landing.php?g=3NJx

Our current debt to GDP ratio of around 100% is definitely above the recommended level and a source for concern, but not nearly as bad as the 120% at the end of World War II. Obviously, as with any budget, the two basic components are spending and revenue. So let’s look at which of these elements as a percentage of GDP is driving the increase in debt since 2000:

//research.stlouisfed.org/fred2/graph/graph-landing.php?g=3HGg

As the graph shows, increased spending and reduced revenue are equally responsible for this explosion of debt. In fact, for the period of 2000-2007, it was actually reduced revenue that accounted for the growth in debt. And since 2007, reduced revenue and increased spending are both equally responsible, which is what you would expect during the greatest financial crisis since the Great Depression as automatic stabilizers such as unemployment insurance increase spending while tax revenue decreases as the economy shrinks. And spending as a percentage of GDP has already fallen by nearly 5% from its peak in 2009. In fact, if we could have kept the same level of revenue we had in 2000 until today, last year’s annual deficit would have been under 1% of GDP, well under the 2 or 3 percent that is recommended. As a percentage of GDP, spending is going down and revenue is going up – we are headed in the right direction.

In next week’s edition, we will look at how we might begin to reduce the amount of debt outstanding, especially as a percentage of GDP. Obviously, we were able to do that after World War II and, although it seems to have fallen down the memory hole, we also did it in the late 1990s. So we can do it again.

That’s just reality…