One of the more interesting issues we face is coming to terms with our national debt. This is the first of two columns discussing our national debt.
Too much debt ultimately constrains the government’s ability to spend money on discretionary items, which seriously impairs the government’s ability to function effectively.
It seems as though almost everyone is a deficit hawk when the opposing party is in power, yet when their party comes to power many seem to think the deficits are spent on worthy causes.
Democrats blame the Bush Administration for massive increases to the national debt, while Republicans revile President Obama for the increase in debt during his tenure in office.
However, if we look back through American history, thirty-five out of forty-four Presidents saw an increase in the national debt during their term of office. Of the nine who did not, two died in the first year of their presidency. Grover Cleveland, who counts as two presidents by virtue of serving non-consecutive terms in office, saw a reduction during his first term, but government borrowings expanded rapidly during his second term. The last Presidency to see a reduction in national debt was that of Calvin Coolidge.
This effectively means that none of the national debt incurred since the Coolidge presidency has been paid down. If you are interested in seeing the historical levels of national debt by year, you can find it at https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm. As an historical note, our national debt was only $33,000 when Andrew Jackson left office. His fiscal policies were so extreme that his successor, Martin Van Buren, presided over a sharp economic downturn.
While our debt seemingly never gets paid down, it becomes diluted by inflation and by economic growth. Economists will tell you that the amount of outstanding national debt is not as important as the percentage of the debt in relation to the size of the economy.
Since the amount owed is not indexed by inflation, the amount our government owes is reduced over time because its debts are expressed in dollars that are worth less today than when the debt was incurred.
I realize the next couple of paragraphs may be a bit wonky, so please bear with me.
Our current national debt is approximately $20 trillion. That amount includes about $14.7 trillion incurred during the Bush and Obama Presidencies. When we look at current dollar values, about 73 percent of our national debt was incurred since the year 2000. Putting that in perspective, only about 1.2 percent of our outstanding debt was incurred to finance World War II.
Here’s the wonky part. If you look at our current national debt, expressed in 1945 dollars (which are worth a lot more because they have not been diminished by seventy years of inflation), it is only about $1.5 trillion. When expressed in 1945 dollars, the $259 billion incurred to finance World War II comprises 17 percent of our current debt while the post-2000 debt represents only about 58 percent.
Thus, seventy years of inflation reduced the World War II borrowings from 17 percent to 1.2 percent of our debt.
The takeaway is that inflation benefits debtors because they will repay their debts in dollars that are less valuable.
Now let’s look at our debt in relation to the size of our economy. Consider this analogy. A $5,000 debt is difficult to repay if the debtor makes $10,000 annually. However, if a person making $100,000 incurs a $5,000 debt, it will be much easier for that person to repay the debt.
That is why many students incur large amounts of debt at a point in their lives when they don’t have the financial means to repay the loans. They are counting on substantial increases in their income, and to a lesser degree inflation, to allow them to repay their loans.
The problem for many of these students is that, after graduation, they continue to incur additional debt, and the payments to service that debt may grow faster than their income. This makes it difficult for them to repay all their debts without affecting their lifestyle.
The same is true of the government, except that the government can perpetually refinance its debts. The government counts on economic growth and inflation to reduce its debts to a small amount over time.
This brings us to the second important metric — debt as a percentage of our economic output. If government debt is small in relation to economic output, then there usually is no need to worry about how it will be repaid. On the other hand, if debt is large in relation to our economic output, repaying the debt can be burdensome to our economy.
In my next column, I will discuss our national debt in the context of our economic output and current trends which threaten to undermine our long term economic prospects.
Jim de Bree is a retired CPA who resides in Valencia.