Outside the Beltway

Outside the Beltway

Record Debt Level

Steve Verdon
5

Yep, that is the other story linked at the top of Drudge today. Basically, another story of how we’ve supposedly hit a record in terms of national debt. In nominal dollars its true. But there have been periods when that debt was higher when measured as a ratio of GDP (during WWII the debt went over 100% of GDP). So is it a record? Yeah, kinda.

Now that being said, I do think the rapid increase in national debt and the projections that the rate of increase isn’t going to slow much and that national debt will rise from 41% of GDP to around 80% of GDP is problematic. After WWII there was a general consensus that the debt had to be paid back down to a reasonable level. If you were to graph national debt as a ratio of GDP you’d see a steady and rather rapid (by today’s standards) decline. That consensus doesn’t seem to hold today. When Dick Cheney famously said, “Deficits don’t matter anymore,” not many seemed to realize that this mindset held for not just Republicans but also Democrats as well.

There is the risk that the buyers of U.S. government debt might not find it as attractive an investment as they once did. Just a few years ago the prospect of U.S. national debt rocketing up to 80% of GDP would have been unthinkable. Now we are hoping that we hit 60 or 70% and stop there. What could then happen is that the U.S. government would have to offer the debt at a higher interest rate. This would then start to crowd out other investment. If the government offers debt at 2.5% interest (made up number) and private investments that have higher risk offer debt at 4.5% (another made up number) then there might be buyers for both. But if the government offers its debt at 4.5% and is percieved to still be of less risk than the private debt, nobody will buy the private debt.

This could reduce future growth rates. When I look at the projections by Obama’s own economic team and then hear him say, “I’m not expanding the size of government just to expand the size of government,” while probably true, I think it is also safe to say that Obama sees a much larger government as necessary. Obama’s view is that more government is better than less government.

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5 responses to “Record Debt Level”

  1. Tlaloc Avatar
    Tlaloc

    Personally I’d be considered pretty hard left by most measures and I’ve said repeatedly that I’d support a balanced budget amendment that was carefully written and which allowed for deficit spending during times of war or declared emergency (and I believe the current economic crisis would qualify as an emergency for now at least).

  2. Michael Avatar
    Michael

    I think it is also safe to say that Obama sees a much larger government as necessary. Obama’s view is that more government is better than less government.

    The second statement doesn’t follow from the first. If an oncologist saw exposing a patient to radiation as necessary, that doesn’t imply that said oncologist’s view is that more radiation is better than less radiation.

  3. odograph Avatar
    odograph

    NPR Marketplace on Bailout Nation

    Kai Ryssdal: Years from now, when you hear the word “bailout,” you’re probably going to think of this particular moment in economic time. And all the money that the government has given to banks and automakers and insurance companies. Even the porn industry asked for a handout, although they didn’t get it. Barry Ritholtz writes about the current state affairs in his new book “Bailout Nation.” He works on Wall Street. He’s the CEO and Director for Equity Research for a company called Fusion IQ, so I asked him where we are right now in the bailout story.

    BARRY RITHOLTZ: We’ve kinda gone through this cycle of, we don’t really understand it but it sounds like a lot of money, to, gee, I guess it’s an emergency they have to do it, to, this was absolutely a generational theft — why did we give all this money to people who caused the problem in the first place? This is ridiculous.

    My position was (a) that we should do the minimum to prevent system collapse, and (b) that any stimulus should time-shifting things were going to do anyway (rather than digging holes and filling them up again).

    I’m not sure that it is evident yet what we really got, but Barry’s definitely got the vibe.

    I’d go with his analysis over “expanding the size of government just to expand the size of government.”

  4. steve Avatar
    steve

    “When Dick Cheney famously said, “Deficits don’t matter anymore,” not many seemed to realize that this mindset held for not just Republicans but also Democrats as well.”

    I thought it was pretty well documented that Rubin convinced Clinton to hold back on any ambitious programs because of the debt issue. They wanted to work the debt down. Do you see that as not true? I would have to go back and look at old reports, but I think I remember this accurately.

    Did you get around to looking at the CBO data delineating how much of the debt is Obama’s and how much legacy/entitlements?

    Steve

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