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Our national debt is once again in the news, since it has supposedly reached a staggering $40 trillion. I say "supposedly" only because that's not really true. $40 trillion is the amount of Public Debt Outstanding, which includes $7.75 trillion of Intergovernmental Holdings (which means the debt that one branch of the government owes to another). The true measure of federal debt is Debt Held by the Public, which is now $32.3 trillion. You can see the history of all these numbers here.
I offer the following charts—some of which you've likely never seen before—to help one understand our national debt and its implications.
Is our federal debt out of control? a ticking time bomb? No. It's still manageable, but we would all be much better off if the federal government downsized its spending and reduced our tax and regulatory burdens.
Chart #1
Chart #1 shows a long history of federal debt owed to the public. It's plotted on a logarithmic scale so you can appreciate how fast or slow it's been growing over time. Over the period shown, federal debt has increased by an annualized rate of 8.8% per year. Note that the growth of federal debt in recent years is not very different from what it's been over the past seven decades on average.
Chart #2
Chart #2 shows the evolution of federal spending and federal revenues since 1990. It's also plotted on a logarithmic scale. The difference between the two lines is the federal deficit, which in the past 12 months has totaled $1.95 trillion. Note that spending has slowed dramatically since 2022, while revenues have been grown significantly in the past few years.
Chart #3
Chart #3 shows federal spending and federal revenues as a percentage of GDP. The dashed lines show post-War averages for both. Federal revenues relative to GDP today are only slightly lower than they have been for many decades, but federal spending is substantially higher. From this fact alone it's not a stretch to say that the main reason we have a large federal deficit is that federal government is spending very high from an historical perspective.
Chart #4
Chart #4 shows federal revenues as a percentage of GDP vs. top federal income tax rates. Remember the hue and cry when President Reagan slashed tax rates in the 1980s? Supply-siders like Art Laffer argued that lower tax rates would be such a stimulus to growth that revenues would remain strong. Left-wingers argued that the deficit would explode. Based on this chart it's easy to say that if anything, lower tax rates led to a surge in tax revenues from 1983 through 2000. It's the Laffer Curve in action; if tax rates are too high, then lowering them will lead to more growth, rising real incomes, and higher tax revenues. Tax rates were clearly too high in the decades leading up to the 1980s.
Extrapolating from Charts #3 and #4, the worst thing the federal government could do to reduce the deficit is to raise tax rates. Lower spending is the only sensible course of action.
Chart #5
When people speak about the burden of the federal debt, they usually refer to the size of the debt relative to the size of the economy. That's shown in Chart #5. Today federal debt is a smidgen less than the size of our economy. It's only been higher during WW II. But that's not a good measure of our debt burden.
Chart #6
Chart #6 shows interest payments on federal debt as a percentage of GDP, which is the correct way to measure the burden of our debt. Note that it was much higher in the 1980s than it is today. That's because interest rates were much higher back then than they are today. Example: having a mortgage that is equal to 30% of your annual income is much harder if mortgage rates are 8% than if they are 6%. Chart #7 gives you the history of 10-yr Treasury yields to help keep these facts in perspective.
Chart #7
14 comments:
A Tour de force. Bravo
Debt= increased (unknown/unintended) risk
Yes, servicing the debt now is less of a burden than it has been. The problem with a large debt load, no matter the current interest rate, is that some unknown event may occur that raises that rate, and then the trouble starts.
Thanks for your work as always.
Nice post Scott. Txs for the update.
Scott, is that your house on the hill in your blog picture?
So am I correct in assuming that you don't consider off balance sheet obligations along with expected losses from government guarantees, e.g. student loans, etc., as true financial obligations?
Wow, another slide deck dressed up as an article that blames the deficit on spending--never on lack of taxes. Too bad a 2024 bipartisan analysis concluded that the growth in debt this century as a share of GDP has been about equally attribuable to general spending increases (discretionary and entitlements), tax cuts, and responses to the Great Recession and COVID. Tax cuts have their share of the blame--don't just take it from me, or accept some counter from a lightweight with a powerpoint program.
James: I think the numbers speak for themselves. But as for taxes, I would venture to say that tax revenues might well be higher if tax rates were lower. In particular, I think indexing capital gains for inflation would prove to be a big revenue-raiser. The important thing about capital gains taxes is that they are legally avoidable: just don't sell any of your appreciated assets. Capital gains on housing prices have been hugely boosted by Covid-era spending which was monetized by the Fed. Taxing people on inflation-generated gains (which resulted because of bad economic policy) is both stupid and unfair.
If you want to stimulate the economy, drop FDIC deposit insurance back to 100,000 dollars. I.e., banks don't lend deposits.
The DD vs. TD ratio is back to where it was during the US Golden Era in Capitalism. That stokes N-gDp.
Interesting comment regarding inflation adjusted capital gains and taxes.
John Rutledge had some interesting analysis on the federal debt: "Today’s $34 trillion national debt makes up only 5.5% of America’s immense ($618 trillion) stock of total assets and 18% of our ($191 trillion) household net worth. All of those Treasury securities are willingly held (demanded) by investors at today’s interest rates. And the demand to hold Treasury securities is increasing every year in line with our growing net worth, which has grown by an average 7% per year over the past 50 years. That means next year investors will want to own 7% (+ $2.5 trillion) more Treasury securities than they already own today. In other words, the first $2.5 trillion of new Treasuries issued next year—next year’s budget deficit—are already spoken for. The budget deficit would have to be bigger than $2.5 trillion to put any upward pressure on interest rates at all." https://substack.com/home/post/p-211247546
Bring back Bill Clinton!
Causes of surplus under Clinton:
Most= .com bubble including a bubble in employment (and tax receipts from it), tax receipts from capital gains on .com taxes. (cap gains rates were reduced under Clinton), Peace dividend: fall of iron curtain led to a defense spending cut
Some: income tax rate increase on top earners
Most of that had little to do with Clinton's actions as president.
Dear Scott,
thank you for your interesting insights. Just one question regardind: "Chart #6 shows federal debt as a percentage of GDP, which is the correct way to measure the burden of our debt." Shouldn't it be "Chart #6 shows the interest payments on federal debt as a percentage of GDP, which is the correct way to measure the burden of our debt.
Best regards, Thomas
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