Federal Debt A Danger To Business, But Not This Year

Chart of federal debt as percent of GDP, 1940-2020


The U.S. government’s debt exceeded gross domestic product in the recent fiscal year. Another big addition to debt will come with the new $900 billion relief bill passed by Congress. Do we have too much debt, so much that it will prevent future economic growth?

The debt level, both current and anticipated in 2021, is worrisome but not likely to trigger an immediate problem. The new spending does raise the question of when our debt will be a serious problem. Economists are not very good at pinpointing the date of an upcoming crisis, but the country cannot continue on the current path without a day of reckoning. Business strategists should think about higher inflation and greater variability of the economy.

The nation has, in the past, enjoyed robust growth when debt was high. After World War II, debt held by the public reached 106% of GDP. (Debt held by the public excludes debt held in intra-government accounts. The Social Security trust fund, for example, holds U.S. treasury bonds, which are not counted as “debt held by the public.”) The post-war years saw debt grow slowly while GDP grew rapidly, brining the ratio down to a low of 23%. So the high debt itself was not a deterrent to further economic expansion.

The post-war era, though, was marked by fiscal conservatism, as the budget bounced between deficit and surplus. When deficits occurred, they were small relative to GDP, much smaller than U.S. deficits during the good years between the 2008 recession and the pandemic recession. So we are not likely to repeat that benign experience, though it’s possible.

We’ve got another problem not counted as official debt: U.S. obligations to pay Social Security and Medicare. The trust funds are not adequate to cover the liabilities. Our unfunded liabilities are not counted as debt, but they really are. So we are in worse shape than the chart shows.

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