RECAP: How much should we worry about the US Government Debt?

Posted on Sep 08, 2021
Last week, CSU professor of economics, Daniele Tavani, helped us understand How Much We Should Worry About the US Government debt?  The first slide showed a “worrisome” curve showing the rise in total debt over the past 50 years to (currently) 24 trillion dollars. A better indicator of the issue is illustrated by the curve of the Federal debt from 1940 to the present as a per cent of the GDP. The most recent number is 126% (the recent rise observed is thought to be secondary to COVID and should improve with effective management of the pandemic).

Government spending on consumption and investment (and on publicly-funded R&D, not shown) is currently less than in the 1970’s (as a percentage of GDP).  A significant part of the equation which has not received as much attention is declining tax revenue. The tax rates on the top earners have declined dramatically since the 1960s (from 90% to 36%).  Similarly, corporate tax rates have declined from 50% to 10% over the same time period. Two additional summary points here – 1. Debt grows when the government operates a deficit (it earns less than it spends) and 2. Federal consumption and investment spending as a share of GDP has been falling.

So - are we worried yet and how much should we worry?  Fortunately, US Treasury notes remain in high demand and there is no concern of US solvency around the world.  The risk that China is an important challenger is minimal in the short term (at least until they have a viable democracy). The mathematics of debt stabilization is supported by the “least controversial equation in macroeconomics” which states that as long as the US economy grows faster than the interest rate the debt/GDP ratio will stay under control even with the government running small deficits.  Federal interest rates have been kept low, helping get us through both the Great Recession and COVID.

As the US economy recovers from COVID, the deficit/GDP ratio remains more important than the debt/GDP ratio. Again, more emphasis should be placed on the revenue side and a more progressive tax code will improve the ratios and reverse the worrisome trend in income inequality. Currently the top 0.1% get a disproportionate income, lower class income is stagnant and  middle class income is declining.

Excellent questions followed-

How will the financial proposals of the current administration affect debt?

What would be the effects of spiraling inflation on the debt?

Why are government finances managed so differently than household finances?

What is the value of citizen and world confidence on US governments solvency?

Hopefully, we all are a little less worried about national debt after this excellent presentation.

Daniele Tavani is Professor and Director of Graduate Studies in the Economics Department at Colorado State University. Born and raised in Rome, Italy, he received a doctorate in Political Economy from Sapienza University of Rome and a PhD in Economics from The New School for Social Research in New York, NY, both in 2009. Since joining the Economics Department at CSU in 2009, he has published over 30 articles in academic journals or edited volumes, and is a coauthor of the book Growth and Distribution (Harvard University Press 2019). At CSU, he teaches both graduate and undergraduate courses in macroeconomics. He lives in the Martinez Park neighborhood in Fort Collins with his wife Silvia and their 6 years-old son Luca.