Scott Grannis has a characteristically good post on the federal debt. The TL;DR version is that he’s not particularly worried about it:
The “burden” of debt is not the nominal amount, nor is it the size of the debt relative to GDP. The true burden is the cost of servicing the debt, which is a direct function of the level of interest rates. As Chart #3 shows, the size of our debt is indeed huge, but interest rates are historically low. Let me point out a curious fact: a rising debt/GDP ratio tends to coincide with falling interest rates, and a falling debt/GDP ratio tends to coincide with rising interest rates. Not what you’ve been led to believe, I’m sure.
That’s my concern. His chart #6, reproduced at the top of the page, offers the best perspective. Here’s my interpretation of it.
Fiscal policy has been out of whack, out of touch with reality since the mid-1970s. Not coincidentally, that’s when healthcare spending went off to the races. Since the early Aughts it has become significantly worse which is precisely what I said was happening at the time. Obama’s policies made it worse again as did Trump’s tax cuts and COVID spending.
Attributing Biden’s spending to more COVID spending is just making excuses. The necessary relief had already been given; his additional spending has precisely the effect one would have expected and that theory dictates—it produced inflation. And you’ve got to recognize that debt overhang makes growing past it that much more difficult. And for goodness sake we’re not going to accomplish that by importing entry level workers who require more public spending than they produce in tax revenues.
The only way not to be concerned about servicing the debt is if you belief that higher interest rates will be transient. They will be but only in the sense of sic transit gloria mundi. Everything is transient. We’re saddling the kids who’ve been born in the last 30 years with high interest payments that will be increasingly difficult for them to bear.
If I’m a “debt scold” I’m an equal opportunity scold: I criticized Bush’s tax cuts, Obama’s increase in healthcare spending, Trump’s tax cuts, and Biden’s spending as fiscally irresponsible. Now we’ve got to pay the bills which are a lot higher than they would have been with greater responsibility.
“As Chart #3 shows, the size of our debt is indeed huge, but interest rates are historically low. Let me point out a curious fact: a rising debt/GDP ratio tends to coincide with falling interest rates, and a falling debt/GDP ratio tends to coincide with rising interest rates.”
A strange thing to say, considering the last two years.
I don’t know what will happen, but our interest payments will certainly increase – the only question is by how much and for how long. And I suspect that Congress will just finance that by borrowing more to cover the difference to avoid trimming spending or raising taxes. It’s a grand experiment.
“The “burden†of debt is not the nominal amount, nor is it the size of the debt relative to GDP. The true burden is the cost of servicing the debt, which is a direct function of the level of interest rates.”
That hardly qualifies as analysis. The ability to service debt is a truism, but wholly lacking in information. Debt to GDP is just a handy ratio, better expressed as debt to national income, and in a corporate setting would be called debt to cash flow. Its effectively linked to debt service.
Apparently the gentleman believes two things: 1) there is no metered money; the debt comes without interest and 2) interest rates will always stay low.
Interest rates may be low if people, or the Fed, are willing to purchase government issuances. We are experiencing the effect of that right now.
When corporations exceed their debt capacity they can only raise equity or drown in the debt. Governments can raise taxes, a drag on growth, or issue more debt, eventually drowning in interest payments or debauching the currency.
I’ll take you at your word this guy generally writes good stuff, but this article is nonsense.
Link goes to health care spending as percent of GDP. The increase from 60-70 is essentially identical to the increase form 70-80. Its 80-90 that shows a big jump. 90-00 has a small increase and 00-10 has another large increase. 10-21 shows little change. So I am sure health care spending contributed but its effect in the 70s was small. There was such a large debt increase in the 80s and I think we know defense spending was part of that so maybe health care too.
https://www.statista.com/statistics/184968/us-health-expenditure-as-percent-of-gdp-since-1960/
Steve
From roughly 1965 to 1972 the health care sector realized increased revenue due to additional government spending and increased utilization. From about 1972 to 1980, accustomed to the increasing revenue, the sector increased prices (as theory would suggest). Around 1980 Congress finally noticed that Medicare spending had increased far beyond the estimates of 15 years previously and began to tighten up. From 1980 to 1990 prices continued to increase “to keep up with inflation”. Health care spending has been keeping up with inflation ever since. However, in 1960 health care comprised about 5% of GDP. Now it’s pushing 20%. Increases in the price of health care accounts for a much larger percentage of total inflation. Consequently, when health care “keeps up with inflation” it’s a positive feedback loop.
“There was such a large debt increase in the 80s and I think we know defense spending was part of that so maybe health care too.”
Yes, and I admit to being rusty, but I think the numbers are directionally correct, so I would caution you, steve, on the defense spending argument:
Defense spending had declined steadily in the late 70’s, after the war. Some felt it was starved. In any event the “massive defense buildup” increased defense as a percent of GDP from 4-5% to 7%. However, it has steadily declined since. I believe it is currently something like 3%, maybe less. I don’t know what the right number is, just that its less. Its government after all. But pointing to defense and not other sectors (eg health care or education over that past 30 years) is just gaslighting.
It should be obvious to any thinking person that we have a spending problem. Spending benefits politicians and favored recipients, especially reliable voting constituencies. As I always note, if you keep pulling the lever for the goody man, er, incumbents, you are the real problem.
Free beer politics still works. But teher is no free lunch. Why is the electorate so dumb? They are not. Apathy, indoctrination and perceived self interest.
Only one answer: term limits for all pols. Will never happen. You tell me the ultimate result.
I thought I made it clear health care was part of it but the increases dont quite add up with when we had larger increases in debt, and in particular when you look at the last 10-11 years growth in health care spending has been pretty restrained while debt kept increasing. So its part of the problem but there are other factors.
Steve
Dave Schuler: Obama’s policies made it worse again as did Trump’s tax cuts and COVID spending.
Hmm. From the chart you provided it looks as if the difference between spending and revenues decreased during both the Obama and Clinton administrations, and again under Biden.
I didn’t mention Clinton. The debt has increased under every president every year since 1930.
Dave Schuler: I didn’t mention Clinton.
Dave Schuler said, “Fiscal policy has been out of whack, out of touch with reality since the mid-1970s.”
Dave Schuler: The debt has increased under every president every year since 1930.
Debt would be a different chart than you provided for discussion. However, even if we include intra-government debt, gross debt decreased in 1947, 1948, 1956, and 1957.
In any case, Democrats have, over recent decades, generally worked to restrain the deficit, while Republicans increase it again. Clinton would be a case in point, where specific fiscal policies were enacted to reduce the deficit, which was essentially balanced in 2000—with a substantial cash surplus.
” The debt has increased under every president every year since 1930.”
Use nominal dollars and dont account for GDP growth and you can make such a claim but I dont think that is how we should look at it.
Steve
The federal debt is presently more than 100% of GDP. There’s another chart in the linked post that illustrates that. As mentioned before debt overhang reduces growth. The chart illustrates fairly neatly why I opposed both Bush’s and Trump’s tax cuts.
Those who assert that we don’t have a revenue problem we have a spending problem have a point, too. Increased debt makes it harder to realize the revenue necessary to pay for the spending. Income inequality makes it even tougher. The fact of the matter is that it’s easier to tax the middle income and the poor than it is the rich.