Do Deficits Matter?

There is a lot of hue and cry of going on about raising the debt ceiling. On the one hand, not paying America's contractual obligations would be very bad. On the other hand, is spending out of control and hurting future generation's prospects? Hmm...The Peterson Foundation tracks the U.S. national debt in real time and as of 11:00 am today, it was...

That seems a large number, like a really, really large number. Nearly $100,000 per American. The three main drivers of the U.S. national debt are:

1. Demographics. The U.S. population is aging which puts pressure on the federal budget, in particular on vital programs that serve older Americans like Social Security, Medicare, and Medicaid.

2. High healthcare costs. The U.S. healthcare system is the most expensive in the world, but we don’t really get what we pay for.

3. Inadequate revenues: The U.S. tax system does not generate enough revenues to cover the spending policymakers have enacted. For example, 39 U.S. corporations reaping over $120 billion in profits paid no federal income tax from 2018-2020!

The U.S. debt-to-GDP ratio is now over 100%. That sounds bad, is it though? The chart below (click to enlarge) shows the level of debt of most of the world's countries. If we assume green is good, dark red as bad, well things get confusing. Some of the richest countries in the world have very high debt-to-GDP ratios: look no further than Japan (257%), Italy (157%), U.S. (133%), Canada (116%), France (115%), etc., while developing countries like Afghanistan (9%), Nigeria (32%), Bangladesh (40%), Indonesia (41%), Vietnam (48%), etc. have low debt ratios. Sure, there are rich countries like Norway (42%) and Denmark (42%) with low debt % but also poor countries like Sudan (212%) and Sri Lanka (105%) with high debt %. So the big takeaway is it that there is no strong relationship between debt levels and economic strength.   

In fact, perhaps countries like the U.S. and Canada should be borrowing more. A research paper by prominent economists Jason Furman and Larry Summers determined "that the burden of debt is best measured by annual inflation-adjusted interest payments as a percentage of GDP and that anything under two percent should be sustainable." At present, it is negative...suggesting we should be binging on debt. Savers will effectively pay the U.S. government to borrow. And if nothing else, we should be trying to lock in low interest rates for longer periods. The average maturity of U.S. Treasury debt is just 63 months, so it might be good idea if future bond issues lean into longer duration debt--20 or 30 years.

As long as the money is put to productive use, there should be no issue...growth solves all problems. Of course, the Left, the Right and everyone in between have different opinions on what constitutes good use of money...but at least when real interest rates are negative those decisions should be easier. So, I guess Dick Cheney, of all people, was right?