Is the U.S. National Debt Excessive?
As the recent tapering of the Fed purchases of government and mortgage-backed securities indicates, the efficacy of monetary policy in stimulating the US economy has started to face diminishing returns. Indeed, much of the 3.4 trillion dollars of new money pumped into the economy by the Fed over the past six years in response to the financial crisis is gathering dust in the vaults of commercial banks. This reflects both the reluctance of banks to lend and the reluctance of consumers and businesses to borrow, given the still depressed state of the US economy. As a result, even the Fed is now openly acknowledging the need for more fiscal actions. If consumers and businesses refuse to spend, then the government should step in to invest the idle funds in a host of productive capital investments, from infrastructure to education to healthcare.
Given the current US national debt of roughly 100 percent of US national income, however, there is stiff resistance in US Congress to any adoption of expansionary fiscal policies. Blaming the government for recent budget deficits, there is indeed a Congressional push for contractionary fiscal actions. Without significant increases in taxes and cutbacks in government spending, the congress seems to imply, it is only a matter of time before the US government will go broke. Thus, to encourage businesses to invest and hire more, it is necessary to have more austerity and less regulation.
While alarming, the foregoing analysis is seriously lacking. To begin with, the recent deficits have been caused by the Great Recession, and not the other way. Falling tax revenues and rising unemployment benefits always tend to add to budget deficits during recessions, and the current crisis is no exception. Indeed, any attempt at fiscal austerity during recessions will be self-defeating and only intensify the economic downturn. Thus, the major barrier faced by many businesses in their plans to expand is neither the state of the government budget nor the preponderance of regulations. Indeed, many businesses have prospered in the past under both of these conditions. The problem is rather the insufficiency of aggregate demand. This fact is borne out by the austerity experiences of many European countries, which have only served to prolong the economic mess in those countries.
At the same time, at 100 percent of US national income, the US national debt is hardly excessive by historical standards. The same ratio was at a level of 125 percent in 1945. In addition, it is currently 250 percent for Japan, 130 percent for Italy, 100 percent for the UK and Spain, and even 90 percent for the mighty Germany. Interestingly, based on some recent data, the same ratio is 200 percent for IBM, 300 percent for DuPont, 400 percent for Boeing, and 1400 percent for Caterpillar. Indeed, for many American households it is about 250 percent.
Of course, it may be objected that most private borrowing, unlike government borrowing, is intended for productive investments. But governments do also borrow to invest in a variety of capital goods, such as roads, ports, education, healthcare, defense, and research and development. In fact, if separate budgets were prepared for current and capital government expenditures, as is done for private entities, a case could be made that without public investments, government budgets would often be in surplus. Additionally, to the extent that public investments would result in faster economic growth, the dividends on future incomes could more than pay for current government interest costs. Thus, it is not true that debt is always a four-letter word, especially if used to acquire assets. In this light, what matters is not the ratio of debt to income, but rather the ratio of debt to assets. Based on this measure, the US government is far from the danger of insolvency.
Finally, for nations issuing their debts in their own strong currencies, such as the US, the issue of insolvency is moot for another fundamental reason: They can retire their existing debts with their newly printed currencies. While this action may prove inflationary under normal conditions, nobody should lose sleep over it during the recent global depression.
Hassan Shirvani, Ph.D.
Professor Cullen Foundation Chair in Economics