Our Ballooning National Debt

This time last week I created one of my more unique posts. A commenter suggested that if I was in search of a topic I could write about what I thought of the "ballooning national debt." I usually try to keep closer to the personal Five_Presidents finance theme than that, but a request is a request.  Gotta keep the readers happy.

The first thing to say is that anybody who confidently predicts any particular result from borrowing so much money is full of it. Nobody really knows what the long term effects are or what will happen next. We can speculate on it, and some prognostications may be more reasonable than others, but ultimately these are all just educated guesses.

With that disclaimer out of the way, let’s start with the big picture. Below is a chart of the US Federal Debt as a percentage of GDP. I got the data from the useful site usgovernmentspending.com.

 

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I believe that viewing the total debt as a ratio to GDP, that is, to the size of the overall economy, is the best way to understand just how big it is. And isn’t. There is a lot of buzz around now about how totally unprecedented the current level of debt is. They even had to modify the national debt clock to allow for another digit, don’t ya know.

That’s true, but once you adjust for inflation and the growth of the economy over time, you realize that what we have now is not, quite, an all time high. That title goes to 1946, when in the aftermath of the Second World War the government owed the equivalent of 121% of annual GDP. The current projection for 2010, 98%, isn’t radically lower, but it can’t be said that we are someplace we’ve never been before.

And for all the dire warnings about how we are mortgaging our children’s future, it has to be acknowledged that the decades following 1946 were pretty darn good economically.

That does not mean that we should expect no ill effects from our current binge of government largess. Firstly, the WWII spending was understood to be a one-time thing that needed to be undone as quickly as possible. By 1948 government expenditure had been reduced to less than half of what it had been in 1945. The government actually ran a surplus for five of the six years 1947-52.

Secondly, it would be foolish conclude that the high debt levels of 1945 caused or even contributed to the post-war prosperity. Beating the Nazis was probably a good investment, but in and of itself it is hard to imagine how having that much government debt around could have helped. The most reassuring thing that can be reasonably said is that the economy grew in spite of the high levels of debt.

Of course, nobody seriously argues that the debt is a good thing, only that is not as bad as all that. More to the point, just about everybody agrees that increasing the debt is a bad thing, but that it’s preferable to raising taxes or failing to spend money on a favored government program. For just about as long as any of us can remember, this has resulted in a political compromise wherein we sacrifice our vague worries about the debt so we can have our cake and eat it too.

The core of  the problem, in my humble opinion, is that those worries are so vague. It is intuitive that more government borrowing is a bad thing, but what exactly is bad about it is beyond most of us. The best explanation I can give is that government debt is a sort of artificial substitute for real investments, the kind that involve building factories, developing technologies, and otherwise growing the economy. The more government debt is around to compete for our investment dollars, the less the economy grows in the future.

If a growing debt wasn’t so abstract, if it had some kind of immediate and obvious consequence, our elected representatives might handle it better. Being told that a larger government debt is a bad thing is like being told that you should eat better and exercise more. It’s not that you disagree, it’s just that your current lifestyle is pretty comfortable and until you have that heart attack it is hard to get yourself motivated.

I am fond of saying that the problem with democracy is that we get the government we deserve. In a nation where Swoopo can prosper, Roth IRAs confuse people, and until relatively recently millions thought that house prices could never go down, is it any surprise that the national debt grows?

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