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Is U.S. debt close to 100% of GDP?

July 29, 2011

I had a political debate with some guys on Facebook the other day. It was about the federal debt.

Facebooker…The national debt is getting close to 100% of the GDP. We need to get things under control!

For the moment let’s put aside the fact that the phrase “national debt” includes debt at the state, city and municipal levels for which the federal government is not responsible.

We also need to put aside the fact that the statement “debt is close to 100% of GDP” is including some debt it shouldn’t, namely $4.5 trillion of “intragovernmental holding”. In plain English, that’s debt that we owe to ourselves (e.g., Treasury securities held by the Social Security Administration). That is not really debt, it is just a promise that one arm of the government will deliver money to another arm. (source, Business Insider).

The truer picture of debt is “Debt Held by the Public” which currently sits at something between $8.6 trillion and $9.7 trillion. I say “between” because the CBO charts are a little hard to read, and the number is a moving target. Also, the CBO prints some reports using “Potential GDP” but others using presumably “Actual GDP” (source, CBO page 12 of PDF, and CBO).

What’s this mean? Actual debt is something like 60% to 65% of GDP. The problem of course is the recent very rapid rise of debt as a percent of GDP. It’s on an unsustainable trajectory, and we must get it under control. It’s like a automatic transmission automobile that starts moving over a flat surface when you let your foot off the gas. It’s a whole heckuva lot easier to stop the car when it’s going 2 m.p.h. than when you let it pick up speed going down a hill and it hits 15 m.p.h.!

Temporarily Bad

That said, we’re in the middle of the Great Recession. That means we’re in a temporary situation that looks worse than it is because GDP is down sharply (consumer spending was 2/3 of economy and they’re not spending much anymore due to housing bubble, etc). Meanwhile, spending is up (2 wars going “on budget”, TARP funds mostly but not completely paid back, stimulus spending didn’t boost economy enough, Bush tax cuts to UberRich continued at GOP behest). To panic now because our debt is nearing 100% of GDP is nonproductive.

Think of it this way….  Looking at our debt picture at present is analogous to a family where hubby lost his job and wife’s hours were cut back by 1/3. They charge 9 months of living expenses to their VISA, then look at their debt profile and panic. It’s not time to panic; it’s time to look at all the facts at hand and come up with a reasonable plan for getting back on track. That plan is certainly going to include getting a part time job (more income) and cutting back spending.

History Repeating

What’s more, we’ve been close to 100% debt-to-GDP ratio before and bounced back very nicely, and quickly, thank you. In 1950, US debt was at 80% of GDP; in 1960 it was only 46% of GDP. Yet total debt actually increased by during that decade from $219 billion to $237 billion (source and source).

What happened? The economy boomed. That means more GDP which makes debt as a percent of GDP smaller.  Moreover, the economy boomed despite the fact that the top marginal personal income tax rate was 91% (source, and corporate tax rates were above 50% compared to today’s corporate tax rate of 35% (source, Visualizing

Booming economy = diminishing debt-to-GDP ratio, even when debt actually grows a bit.  Truly, it’s (still) all about The Economy, Stupid.

What we need are jobs. The idiots in charge of the GOP scream “The government can’t create jobs” and (I assume) by that they mean government spending doesn’t create jobs. (more on that fallacy in a later post). In addition, they’ve hoodwinked millions of their party faithful into believing the opposite: that cutting government spending does create jobs. It doesn’t. Cutting government spending might make currently smug/angry people (i.e. Tea Partiers and other curmudgeons) feel smugger and justified, but it will not create jobs. And don’t give me the ‘trickle down’ theory that the wealthy who get tax breaks will work that much harder, creating more tax revenue. Bullshit. The UberRich might work harder but they’re use those extra dollars to hire another tax accountant to shelter their millions offshore. I’m sure the Plastered Bastard will have something contrary to add on this.

Instead, here’s a jobs creation idea

…let’s federalize the National Guard. There are approximately a half-million people in the Guard. We can put them to work patrolling our borders**, at our shipping ports and airports, our federal buildings and court houses. Hooray! Better national security! Take that, Al-Qaeda! (**screw the border fence, Nat’l Guard is cheaper!)

But what about those empty jobs vacated by the Guardspeople? Bammo! Welcome to Part 2 of my plan. Businesses can hire long-term temporary employees to replace the National Guard personnel who left town. Because businesses are apparently incapable of doing anything without a tax credit, let’s offer a nominal tax credit of some kind in exchange for every formerly-unemployed person they hire and keep on the books for 2 years.

We could ease the economic burden of departing national Guard soldiers by offering their families a temporary stipend to cover the income gap between the former pay and the pay the Guard gives out. Before you get all crazy about the Feds handing out cash, check out the study that shows the single largest return-on-investment for any type of government program is for Food Stamps and Unemployment checks, which are essentially cash. The return into the greater economy is $1.61 for each $1.00 spent funding unemployment checks. ROI on tax credits to individuals is 32 cents for every dollar spent. (source, The Economist and Moody’s

If the Feds announced a plan like this, and said it would continue with rolling deployments for up to 2 to 3 years, businesses would have a great deal of certainty about how long they needed to hire and retain temp workers. That’s what businesspeople claim they want.

Voila!! New jobs, which is what we really need anyway, plus better national security.

New jobs = more consumer spending and more tax collections = higher GDP = debt as percent of GDP drops. Of course we must subtract something for the tax credits and unemployment checks written. I’ll let the policy wonks figure out the numbers. If it pencils, we should do it. If it costs more than it saves, I’ll go back to the drawing board.

Meanwhile, smoke ’em if ya got ’em  (translation: reply if you’ve got something to offer or add).


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