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Home » Opinion: Does America have too much debt?
The US federal government last reported a budget surplus in fiscal 2001. (Fiscal years begin in October of the previous calendar year. Don’t ask.) Since then, the government has borrowed about $20 trillion. That’s a big number, even for an economy as large as the United States: Publicly held national debt as a percentage of gross domestic product has roughly tripled, from 32% to 94%.
I have argued that despite all this borrowing, we are not in any kind of debt crisis. Historically, US debt is not all that unusual. Britain, for example, has emerged from every major war over the past three centuries with a debt-to-GDP percentage far in excess of current US levels, and has taken many decades to reduce that debt ratio.
Still, the political history of America’s deficits in the 21st century is not edifying. George W. Bush squandered most of the 2001 surplus he inherited on tax cuts that favored the rich and the invasion of Iraq, both of which were sold to the public under false pretexts. Donald Trump rammed through another big tax cut in favor of the rich, again falsely claiming it would do wonders for the economy.
The Democrats haven’t done anything comparably egregious — sorry, I won’t say that to “both sides” — but Joe Biden’s $2 trillion American bailout seems excessive in hindsight and helped fuel a surge in inflation that is fading seems but caused much grief.
But as much as one may criticize the budget decisions that got us to this point, it’s important to remember that this isn’t quite the same as saying that we should have borrowed a lot less money than we did have done it. It’s certainly possible to imagine alternative stories that would have left us with much less debt. But in many cases austerity would have created problems of its own, and the cost of low leverage would likely have been high.
Let’s think about when and how most of the debt was incurred. It is important to adjust debt to the size of the economy. My favorite measure – because it avoids some of the distortions associated with recessions – is debt as a percentage of potential GDP, an estimate of what the economy could produce at full employment.
While lavish tax cuts certainly didn’t help, the bulk of the debt arose during two episodes: the Great Recession of 2007-09 and its aftermath, and the COVID-19 pandemic.
In the case of the recession, the main reason why the deficit soared was that tax revenues collapsed along with the economy, while spending on social security, particularly unemployment benefits, soared. Former President Barack Obama’s stimulus package was also a factor, but it was only part of the story.
That increase in the deficit was actually a good thing at the time: it helped keep spending going, which in turn supported the economy, and this was arguably one of the main reasons we didn’t see a full-blown repeat of the Great Depression. Indeed, as some of us desperately argued at the time, the allure was far too small and was fading far too quickly.
But should there have been greater efforts to balance the budget after the crisis? The problem is that the recovery from the Great Recession has been slow. It took about eight years for unemployment to return to pre-crisis levels.
And spending cuts or tax hikes to limit debt would have slowed that recovery. Normally, the Federal Reserve can offset the depressing effects of a fiscal contraction by cutting interest rates — but after the Great Recession, it didn’t have that option because it had already done almost everything it could by cutting the interest rates it controlled until the close Zero.
So the big spike in debt between 2007 and the late 2010s was indeed justified by economic events, and any attempt to avoid that spike would have done more harm than good by slowing our recovery even further.
Then came COVID, and this time the government responded very forcefully with trillions in aid to families, businesses, the unemployed, and state and local governments. The result was a pleasingly rapid economic recovery – again accompanied by a surge in inflation, which appears to be abating. Of course, there was also an increase in debt.
So should we try to pay off this debt now? Aside from the fact that it’s just not going to happen politically, would it even be a good idea economically?
The answer depends in large part on whether the Fed would be able to offset the dampening impact of fiscal austerity on demand. Right now that wouldn’t be a problem as the Fed is raising rates to fight inflation; all it would have to do is slow or reverse those rate hikes. But what will the economic environment look like in, say, two or three years?
Well, I think we’re probably going back to a low interest rate era. Markets are also expecting the Fed to reverse many of its recent rate hikes, though not all. This could all be wrong, but if we find ourselves back in a low interest rate world, it will also be a world where trying to reduce debt would cause many economic problems at a time when the Fed was doing its best tool for dealing with them.
So have we borrowed too much money? Probably not. During these two economic crises of COVID and the Great Recession, increasing debt was more than justified. I only wish some of the other loans had been used for better purposes: eradicating child poverty rather than corporate tax breaks, rebuilding infrastructure rather than invading Iraq. But while our priorities have sometimes been foolish, our borrowing has not.
The New York Times