Tuckahoe Joe’s Blog of the Week: The True Shape of America’s Debt & Deficit “Burdens”

While reviewing Brand Delong’s Blog* I came across and interesting post analyzing the US national debt. I have edited it to shorten it to fit this venue. I hope I have not ignored anything pertinent.

*Brad DeLong. Grasping Reality Newsletter: The True Shape of America’s Debt & Deficit “Burdens” (February 2, 2024)

 

Exploding Debt Since 1981:

The federal debt, as a percentage of the Gross Domestic Product (GDP), was at a low of 21.9% in the third quarter of 1974. By the start of Ronald Reagan’s first budget year in the fourth quarter of 1981, this had slightly increased to 25.2%. Fast forward, and by Bill Clinton’s first budget year, the debt-to-GDP ratio had risen to 48.2%. Clinton and Gore worked hard, even at the cost of alienating some within their party, to lower it to 31.9% for George W. Bush. However, under Bush, it escalated to 53.5% at the beginning of Barack Obama’s first budget year. Despite Obama’s efforts to negotiate with Republicans on the deficit, the ratio was 74.0% when Trump took office, peaking at 103.2% during the COVID-19 crisis in mid-2020. Joe Biden began his term with a ratio of 94.0%, which has slightly increased to 95.4%.

This shows a 23.0% increase under Reagan-Bush, a 16.3% decrease under Clinton, increases of 21.6% under Bush, 20.5% under Obama, 29.8% under Trump, and a 1.4% increase under Biden so far.

Implications:

What’s been happening since the early 1980s, and what does it mean for the future? The U.S. has been an attractive place for global investment, supported by its strong economy. This means the U.S. can afford its debt, borrowing at low interest rates without immediate concern. Viewing the U.S. as a modern equivalent to the Medici Bank, where savers willingly park their money for safety, suggests that with smart fiscal management, the U.S. can manage its debt effectively. This involves aligning spending with tax revenue while managing the debt—borrowing only to cover interest. This doesn’t require a balanced budget but maintaining a sustainable deficit, roughly 3% of GDP or about $800 billion annually. This strategy could gradually reduce the debt without drastic measures, maintaining economic stability and growth.

But there is a problem here: Our current deficit is $1.7 trillion a year—not 3% but 6% of GDP—with no prospects I see even on the most distant horizon of a legislative coalition to reduce it to $800 billion, 3%. That is a big problem. In my view, it may well all end in tears—but, if so, not because of the deficits we have run in the past, but because of the deficits our broken political economy will produce in the future…