The National Debt: How Frightening?

Milton Ezrati

Chief Economist

For a few days in the middle of February, headlines burned with the news that the United States is indebted to the tune of some $22 trillion.  That is one hell of an AMEX bill.  Yet, the stock market rose despite the news, and no one in Washington or finance or the business community seemed alarmed. It was all very strange. In the past, business and financial people, as well as Democrats and Republicans alternately, have howled about the national debt. Now nothing.  In response, it seems a good time to delve into why no reaction and also to offer perspective on the matter of the national debt.

As for the seeming lack of concern, it boils down mostly to the ongoing hypocrisy that has always accompanied questions of debt.  Republicans and business people have always agonized over debt when Democratic policies contribute to it.  They say little about debt when the latest additions stem from their policies, in this case, tax cuts. Democrats usually decry debt at such times.  This time they have refrained from pointing to the red ink because their agenda would involve large additions to debt, too.  They have chosen instead to argue about its cause.  Either side, always and ever, has sought its own interests or rather those of its constituents.  Seldom, if ever, do the arguments stem from principle.

Having established that all parties have always shown a good deal of hypocrisy and cynicism, it would help now to gain some perspective on this huge number.  Twenty-two trillion dollars surely exceeds anything an individual could comprehend much less deal with on his or her own desk.  But, of course, this debt does not belong to an individual.  It belongs to the nation and its considerable resources.  It differs only little from the income the United States economy produces every year.  The country’s gross domestic product (GDP) in 2019 seems set to come in at a little over $21 trillion.  The federal government seems set to take in revenues this year of $3.4 trillion.  Theoretically, then, if the nation directed all its national product to debt repayment, it could just about pay off the outstanding amount in one year.  In a similar way, Washington would take about 6.5 years to pay it down.

Of course, neither the nation nor the government would do such a thing.  Each has other obligations.   But the size of the resources against which the debt stands does take some of the fear out of the otherwise immense figure.  To draw a crude parallel to the individual, one might liken it to a family carrying a home mortgage of 5-6 times its annual income.  That family cannot dedicate all its income to pay down the debt quickly, much as it would like to do so.  It has to eat and clothe itself among other things.  But the circumstance is hardly uncommon and hardly draws squeals of outrage when it becomes known, especially if it is a young family with prospects.

In one respect, the national debt is even less outrageous than the family with the heavy mortgage.  Unlike the family, the government will never have to pay off the debt.  As those on the mortgage approach the end of their lifespan, creditors will refuse to lend.  They will have to pay down the debt.  But the country, presumably, never dies.  As the debt comes due, the government can borrow anew and use those funds to pay off the maturing debt.  It has been doing this for decades, centuries actually.  Because the country keeps growing and thereby expanding the resources available to the government, Washington can always get credit to retire old debt and expand the amount outstanding.  The huge debts run up to fight the Second World War, for instance, amounted to 130 percent of the national product of that time and all came due in the 20-30 years following the conclusion of hostilities.  Washington paid it off with newly borrowed funds.  It could get the funds because its lenders, most the American public and a few foreign governments, could see the growth in the economic and financial resources available to shoulder the debt.

Problems arise when the growth of debt outstrips the expansion of the resources behind it.  Then, creditors would become reluctant to lend, and Washington, instead of “rolling the debt forward” as it has done, would have to repay it.  To bring the matter down to a more manageable level again, it parallels the different borrowing power and inclinations of companies that are growing fast or slow.  Lenders eagerly line up to lend to a company that is growing at say 10 percent a year. That growth will make it easy for management to pay off the debt.  Because the borrowing presumably enables the company to invest and so secure that continued rapid growth, it behooves management to borrow.  Indeed, a reluctance to do so would run counter the company’s interests.  Matters run in reverse for the slow-growing company.  This admittedly imperfect analogy explains why the budget and debt debate circle around whether the policies creating the debt foster growth or not.

This perspective is hardly a complete picture of what is an indisputably complex matter and it in no way suggests that the debt is a good thing.  But it may help explain why the market and so many others resisted the hysteria implicit in the headlines.  They believe – rightly or wrongly – that the tax cuts that most recently have added to the debt will sustain that necessary growth.

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