In absolute terms, the United States possesses quite a large debt: 19.5 trillion dollars. As a percentage of GDP, that is around 103%. It makes sense, then, that many people are concerned about America’s fiscal situation. After all, if any citizen had debt levels that were even a fraction the size of U.S. federal debt, it would be crippling. Nevertheless, I think a lot of fear about the debt is misplaced and ignores a number of important data points.
First, the United States economy is enormous. Thus, seemingly massive debt levels are actually not as large as they might at first appear. As mentioned in the previous paragraph, the U.S. debt to GDP ratio is 103%, which means that U.S. debt is roughly the size of the U.S. economy. For comparison, Japan’s debt to GDP ratio is 220%, and Japan’s economy is still one of the largest in the world. Granted, Japan’s economic situation is wanting in many ways, but Japan’s economy is hardly on the brink of collapse. Thus, it’s hard to make the argument that high levels of debt lead to economic calamity because if that were true, Japan would be a third world country by this point.
When thinking about U.S. debt, it’s always important to factor in the assets of the United States and the services and capabilities that the debt buys. Clearly, creditors believe that the U.S. economy is more than capable of handling current federal spending levels, as investor confidence in U.S. treasury bonds is extremely high. In fact, it’s so high that interests rates on T-bonds are at record lows. For example, 30-year bonds were yielding just .63% as of early August, and that rate isn’t an outlier. It’s also just not true that interest payments are eating up the budget, as debt payments as a percentage of GDP are only 1.3% – a historically low number. Thus, the argument that the U.S. is drowning in debt makes absolutely no sense.
Other people don’t worry about the debt per se, but they instead focus on the risk of rampant inflation as a result of loose monetary policy and excessive government spending. I’m really not sure what they are talking about, though, as inflation rates are incredibly low. Seriously, the Fed is actually upset because they have consistently been unable to meet inflation targets; they can’t even get inflation up to 2%. If people are concerned about inflation levels like those of Weimar Germany or Zimbabwe, they clearly aren’t looking at the data.
It’s also important to remember that inflation doesn’t just happen, rather it occurs because governments want it to. Inflation in the 70s was caused by the Fed unsuccessfully trying to exploit the Phillips curve to boost American economic growth. Inflation in Weimar Germany was triggered in part because German leadership was trying to destroy its currency in order to stick it to French politicians who were relying on German war reparations to support their economy. Inflation, in other words, was the result of deliberate government policy; it didn’t just occur out of the blue. Thus, there is no reason to believe that the government couldn’t reign in inflation were it to get out of hand.
Paranoia about the debt isn’t just misguided, it’s also dangerous because massive reductions in government spending would cause enormous damage to the U.S. economy. This is because government spending accounts for a significant percentage of overall U.S. GDP. Were politicians to significantly scale back government spending, they would shrink the economy and increase unemployment by laying off federal employees. However, the debt would remain the same, as cuts would only reduce the deficit, not the debt. In other words, by eliminating large amounts of government spending, the U.S. would actually end up with a larger debt to GDP ratio. I don’t know about you, but a policy that shrinks the economy, raises unemployment, and increase debt as a percentage of GDP does not seem like a prudent course of action to me.
Of course, we should work to eliminate government waste and eliminate unnecessary or redundant programs. No serious person would argue otherwise. However, we shouldn’t just cut for the sake of cutting. The debt is really not as scary or dangerous as it first appears, and drastic actions designed to eliminate it will only lead to another recession. So, before you start panicking, take a deep breath and look at the data; our fiscal situation is really not that bad.