US Government debt is 106% of total GDP and rising. Good. Let's end Broken Windows GDP while we're at it.
There we are! #17 in Public Debt as % GDP - per Wikipedia and the CIA.
The list of countries around us is intimidating. We wouldn’t want to be Greece or Italy with their entitlement payments, Japan with its Abe-economics resistant strain of low growth, or Zimbabwe with its history of inflationary crises.
Now here's my controversial take- it could be fine. US debt is the safest asset in the world and highly demanded, meaning that it functions very differently than household debt, which is not demanded. When a Fortune 500 company takes on debt (i.e. issues stocks and bonds) we don't cover our ears and shout, "They're broke!" Yet, when it comes to our country's debt (which we must keep clear, is made up of bonds) the TV does the shouting for us.
Your credit card's APR is probably about 15+%. If your debt was 106% of your annual income you'd have already filed bankruptcy.
But the US is selling bonds at supremely low interest rates.
So when we see these charts like this from the Federal Reserve Bank of St. Louis, showing US public debt as a percent of GDP over time, it's easy to get scared. We hit 100% of GDP in 2012 and have yet to reduce our debt to pre-recession levels. Our lackluster GDP growth isn't helping either.
The bulk of this jump since the Great Recession can be blamed on constant war, propping up the banks (and the entire economy), and reducing tax revenues with multiple tax cuts. The list of things worth going into debt for is a valid debate on its own, but the bad choices the government made with the money they borrowed does not indicate that borrowing money is a bad idea. (Although for creditors, it may mean you should wonder how you'll be paid back).
So let's look at recent history. We haven't had a budget surplus since Clinton and even then it was a small anomaly. We've historically averaged a budget deficit of 3% (meaning that every year an amount equal to 3% of our total GDP is added to the national debt).
1) The 2009 federal budget was approved in June of 2008, so although Obama received a terrible deficit and actually reduced the deficit massively, the national debt total still rose.
From 2009 to 2015, the national debt rose from 11.9 trillion to 18.14 trillion. In this time, Japan and China have amassed over a trillion dollars in US debt each, meaning that the interest payments the government makes aren't being reinvested here, a critical benefit of going into debt in the first place.
2) The CBO doesn’t have any projected surplus through 2024.
With the exception of the 8 Clinton years, our government has consistently committed to debt. This generation (like every other) is going to borrow from the future to fund a variety of products ranging from care for the elderly, to multi-billion dollar weaponry to keep us safe. The future generations will be saddled with this debt and it will affect their public policy and their environment (both literal and economic).
So, what do we need to do to make this fair for them? Go into the correct debt.
The American Society of Civil Engineers grades our infrastructure annually. Excusing the conflict of interest of the repairmen telling us what needs repairing this includes drinking water, roadways, hazardous waste, levees, and more. Overall, we earned a D+ again this year, but we've made some improvements (hazardous waste being a critical one) and kept a few good scores (a B in Rail).
The debate can't be about if we are borrowing, it needs to center on what we are building with our debt.
If we go into more debt - strategically - we can boost GDP (lowering our debt to GDP ratio), lower the relative threat of owing foreign countries money (right now 45% of debt is owned by non-Americans) and fix our broken infrastructure.
In 1850, French economist Bastiat wrote his infamous parable of broken windows. Here's a quick edited version -
A man's window is broken by heavy wind and he pays six francs to repair it. His townsfolk say, "at least your money is providing a job for the glass-repairmen". And yet, consider this simple tweak to the story - the glass repairman offered a local boy a franc for every window he broke and it wasn't really the wind.
Can we really say the first is good economics and the other is theft? Of course not. The wind and the boy hurt the man equally. Those six francs would've gone (in Bastiat's words) "to shine his shoes or add a new book to his library".
Infrastructure (and education and healthcare and defense and many other fields that we generally trust the government to handle more than private firms) mitigate the broken windows problem.
When highways are worn out: tires get less mileage, rain gathers incorrectly, and cars get into worse accidents. This economic activity - replacing tires, cars, and lost time - is Broken Windows GDP.
When someone gets sick and they don't have health insurance and their health deteriorates until they lose their job to take medicaid - that's Broken Windows GDP.
So, I say, here's to more debt when it's worth it.
Get our annual inflation (~2%) the cost of borrowing (around 2.3% according to the Treasury) and check the Net Present Value of each potential project. This common finance formula converts future value into present dollars, giving time a value and accounting for interest rates and other costs.
If it's positive, invest! The ASCE and other organizations have done a lot of the legwork for us.
To conclude -
Debt isn't fundamentally bad, even though a rigorous debate on why we're in debt is always needed.
Government debt is demanded- don't fall for the trap of comparing its budget to a household's income and spending.
Thinking about Broken Windows GDP - we can simultaneously invest in the future, fund the present, and reduce our reliance on foreign countries to finance us.
Author's note -
I'm transferring (and editing and expanding) more postings from my website to LinkedIn. I actively answer economics questions on Quora so you can read more of my works there or message me directly with questions! Thank you for reading.