I don’t know about you, but I have trouble conceptualizing really big numbers. For example, scientists estimate that the earth holds 75 times 1018 grains of sand (that’s 75 followed by 17 zeros). Stars in the sky? Even more than that! When I hear these sorts of numbers, the first thing that I think is…well, the first I think is: “is this really the best use of these scientists time?” But, then I get to pondering that giant number. And, you know what? After all that pondering, I still have no freaking idea what it means. I guess there’s lots of sand and lots of stars? I sort of feel the same way about the U.S. Government Debt.
Whenever people want you to think that government debt is a problem, they throw out this number: $31 Trillion. That amount is in fact the U.S. National Debt as of March 2023. And, it is giant. When I hear that number my mind sort of goes blank. I mean, there seems to be less debt than there are grains of sand or stars, so that’s good. But, $31 Trillion definitely seems big.
Big, yes. A big problem? Maybe. It’s worth thinking a bit harder about the debt before just screaming “31 Trillion Dollars” and completely freaking out. So, in this post, I want to provide two different ways to conceptualize the debt. These conceptualizations will make it clear that: a) we aren’t in terrific shape; and b) we also aren’t completely screwed (“completely screwed” is an official, economist term).
[By the way, if you want to help me lower my debt, give my book a read. Plus, I donate 25 percent of my royalties to Big Brothers Big Sisters of Eastern Massachusetts!]
Conceptualizing Government Debt: Debt/GDP
So, the U.S. National Debt is an incomprehensibly big number. But, then again, the U.S. has an incomprehensibly big economy. In 2022, the GDP of the U.S. — a measure of the total value of final goods and services produced in the country — was $25.5 Trillion. So, the U.S. has a lot of debt, but it also makes a lot of valuable (and not so valuable) stuff. I mean, we live in a society with enough spare resources to produce MILF Island T-shirts (if I see that more people click the MILF Island link than my book, I swear to God…).
One way to conceptualize the size of the debt is to compare it to GDP. How big is the National Debt relative to all the stuff produced in the economy in a given year? A nice thing about this approach is that the ability to afford the debt is certainly proportional to the size of the economy. A bigger economy generates more government revenue and can support more debt. Plus, it allows a clear benchmark to the past. Is our debt bigger now relative to the economy than in the past, when both debt and GDP were smaller?
The figure below shows that right now we are at the highest Debt/GDP ratio in recent history. Freak out!! But, we are only a little worse off than in 1949, and the country didn’t fall apart then. Pre-COVID, the U.S. Debt/GDP ratio was not so much higher than it was at the end of the 1940s. To put a finer point on it, debt to GDP was at it’s lowest in the 1970s. And, we all remember what fun economic times those were. Low debt does not equate to good economy.
Figure 1. Debt-to-GDP Ratio, 1948-2022
The picture above isn’t exactly a soothing one. Still, it’s certainly more informative and less alarming than that $31 Trillion number. Debt is bigger today than at any point since 1948 relative to the rest of the economy. But, the gap isn’t as large as that giant number would make you expect. Still, how can the government possibly afford that amount of debt? I’m glad I asked, because that gets me to conceptualization method number two.
Conceptualizing Government Debt: Interest/Revenue
My grandma used to have a saying. She’d say, “it ain’t the debt that gets ya, it’s the paying for it.” (Or, maybe she said “Don’t hit your brother.” I honestly can’t remember.) Government debt becomes a big problem when the interest on that debt — the amount that needs to be paid on the debt each year — is large relative to the government’s revenue. It’s like when your minimum credit card payment is high relative to your salary (e.g., my entire grad school career).
So, the figure below compares the interest payments the government had to make on its debt to its total receipts. This graph shows a slightly rosier picture of the current situation. The share of government receipts being devoted to interest payments is consistent with historical levels. The reason is pretty simple — despite the large amount, the debt issued recently was issued at low interest rates. So, recent debt isn’t as expensive as it was in the past.
Figure 2. Ratio of Government Interest Payments to Government Receipts
Government Debt: How Big a Problem?
You may be wondering, what does government debt have to do with inequality? Well, government expenditures go to programs like Medicaid, Social Security, and Food Stamps. And, those programs help to combat inequality. When people talk about concerns about government debt, they often do so in support of cutting these programs. So, asking whether these concerns are legitimate — or simply a distraction, like a focus on rising crime — is a good idea.
The answer, it turns out, is complicated. Relative to the entire economy, debt is higher than ever. This fact could be seen as alarming. But, the truth is that the government’s ability to afford this debt is pretty similar to historical levels. Still, you may be thinking that this ability to pay interest isn’t all that matters — doesn’t the government eventually have to pay off all this debt? Not really.
How is it that the government doesn’t need to ever pay of its debt? You see, despite what your uncle might say at Thanksgiving, the government isn’t like a household. In theory, the U.S. Federal Government will exist forever (although some have tried to put a stop to that). As long as the government can continue to afford to pay the interest on its debt, it doesn’t necessarily ever need to get to zero debt. So, the second picture is certainly encouraging. The government can afford its debt about as well as in the past. But, then again, interest rates are on the rise, and this could make Figure 2 look a lot worse quickly.
Man, is that one economisty “it depends” paragraph! Let me summarize. The U.S. Government Debt is big. Relative to GDP, it’s bigger than ever. But, our ability to afford that debt is in line with historical levels. With interest rates rising, it’s probably time to start talking to each other about how we want to deal with this issue going forward. Crazy, I know. But, the next time someone quotes you that $31 Trillion number, send them this article and help them put it in perspective.