Credit where Credit is Due. We came across an outstanding article by Matt Phillips from 2012 that does a magnificent job of showing the history of US Debt from 1790 to today.
The complete article can be found here
The Great Recession
The great recession was the perfect storm to blow debt-to-GDP ratios skyward. GDP tumbled. That means that even without a spending increase, debt-to-GDP would have jumped sharply. Moreover, government revenues shrank to their lowest level since 1950 — as a percentage of GDP — because business activity declined; that meant that debt levels would have to rise, even without spending increases. And there were indeed spending increases. For instance, in 2009, outlays increased to more than 25% of GDP, the highest level since World War II. That number declined somewhat, to 24.1%, where it rested in both 2010 and 2011. The U.S. started 2012 with $10.48 trillion in publicly traded debt. And by the end of last week, it was$11.42 trillion.
So how do we get to $16.2 trillion?
Because on top of the roughly $11.4 trillion in US government debt, which can be bought and sold and is floating around in financial markets, there’s also nearly $5 trillion in debt that the US government owes to itself. Those are largely obligations to the trust funds that are used to pay for programs such as Social Security. These aren’t counted in debt-to-GDP charts published here, and are often excluded from such calculations. But if you did include this debt—and there’s an argument to be made that we should, since the government is on the hook to pay these claims—the US debt-to-GDP ratio was just under 100% at the end of 2011.
So what does that mean? Here’s where we get into some arguments. Some economists say that the empirical record suggests that a debt-to-GDP ratio this high is bad for long-term economic growth because the borrowing costs become a drag on other government spending. Others argue that such observations aren’t that helpful because it isn’t as if large build-ups of debt always come before economic slowdowns. Sometimes large buildups of debt sometimes result from shocks to economic growth—such as massive collapses in the financial system.
Still, many people are looking at Japan as a potential cautionary tale of for the US. Japan suffered its own real-estate bubble, bust, and banking failure in the early 1990s. Its debt-to-GDP has surged to more than 200% in recent years. Back in the mid-1980s, it was around 50%. And for what it’s worth, it’s not as if the Japanese economy shows signs of gathering long-term strength any time soon.
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