The national debt was one of the biggest issues during the 2012 election cycle. It has been ingrained into our minds by the media and politicians as the most urgent problem facing the nation.
Websites such as usdebtclock.org add to the urgency, creating an image of out of control spending that must be cured now or disaster is imminent. Even on IVN, there is a column that focuses on it. However, the reality is that the United State’s debt should not be that foremost of an issue.
Due to this cultural fear of the debt that has manifested itself over the past few years, this will likely come as a surprise. Even more, the notion of owing 16 trillion dollars as an issue of little importance will seem outlandish.
Currently, the United States has a public debt, as a percentage of GDP, of 73 percent. While somewhat larger than typical, since 1940 our public debt percentage has continually hovered around 40 percent, with the greatest amount being 113 percent during World War II, and the lowest amount being 24.6 percent in 1974. Tweet stat: Tweet
This low point of 24.6 percent was during the third worst economic crisis in the last 100 years. Meanwhile, during the economic boom of the Clinton presidency, debt varied between 49.5 percent and 34.5 percent. The notion that having a large amount of debt is inherently bad for the economy or that lowering the debt will improve the economy is a fallacy. Tweet stat: Tweet
Public debt also shows that, compared to the rest of the world, we are by no means in an extreme situation. In fact, we are not even in the top 30 nations with the highest public debt as a percentage of GDP.
Nations with truly urgent economic problems such as Zimbabwe (219.7%), Japan (205.5%), and Greece (165.3%), actually have over double the public debt we do. Even if we continued to spend at our current deficit rate, in the 2022 fiscal year public debt would climb to approximately 90 percent of GDP. While this is nothing to scoff at, it would take until approximately 2032 to reach Greece’s debt-to-GDP ratio.
There is also the publicly displayed fear that we will soon be unable to finance the debt due to loan interest rates and a lack of buyers. However, the numbers do not support this claim. The current net interest rate of about 6.4 percent is slightly below the average since 1940, and well below the 1996 peak of 15.4 percent. Economic growth is typically followed by higher interest rates, but the zenith rates of 1996 will not be reached for a very long time due to recovery and growth beyond this.
As for treasury note buyers, the debt isn’t owned in large part by China as commercials such as this one would have you believe. In fact they only control about 7.2 percent, with 33.5 percent of the total debt owned by foreign nations and investors. If for some reason foreign nations started to no longer purchase it (they won’t), the Federal Reserve, private investors, and U.S. citizens making up the majority of treasury note owners would prevent a total disaster while a solution was crafted.
Economists also are not sold on the belief that the national debt is the most crucial of problems. One such individual is Nobel Prize winning economist and New York Times columnist Paul Krugman. In a January 1 article, he stated his belief that the nation can outgrow the debt:
…First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation…So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history. Tweet quote: Tweet
Krugman is joined by individuals such as economist Dean Baker, Mother Jone’s Kevin Drum, economist Zachary Karabell, and many others who also feel that the debt crisis is not all that it is made out to be.
While debate over responsible spending and reform to certain programs is always needed, the delusion over the national debt being the most crucial economic focus needs to come to an end.