06 Jan 2016

Federal Debt “Held By the Public” as Share of GDP

Debt 22 Comments

Someone making a video asked me to dig this up, so I thought I’d share it with you guys too…

22 Responses to “Federal Debt “Held By the Public” as Share of GDP”

  1. E. Harding says:

    The recent spike was caused by the Great Recession. Without the Great Recession, the debt-GDP ratio would have been stable, around 30% of GDP.

    • Major.Freedom says:

      Hypothesizing “without the great recession” is equivalent to “without government intervention”.

      Story checks out.

  2. E. Harding says:

    Outside recessions, pretty much the only things that significantly raise the American debt-GDP ratio are wars.

    • Capt. J Parker says:

      I’m not so sure about that. What increases the debt is running a deficit larger than 3% of GDP year after year. We had a lot of that beginning in 1980. No small reason for the deficits then was the double digit interest rates of the early eighties courtesy of the Fed.

      • E. Harding says:

        Outside recessions. Early 1980s had a recession. I characterize the stance of fiscal policy at the time given that fact as the tightest since FDR.

    • RPLong says:

      So what war were we fighting between 1981 and 1994?

      • E. Harding says:

        The recession of 1981-2. Remember? 10+% unemployment? Long, I seriously don’t think you read my comments before responding to them.

        • RPLong says:

          The 81-82 recession raised the debt-to-GDP ratio almost consistently for the next 12 years?

          • E. Harding says:

            Pretty much. Though Reagan did hurt as well with his military spending.

  3. E. Harding says:

    I’m impressed that despite the recent monetary tightening and fiscal loosening, the debt-GDP ratio still managed to fall this quarter from a year ago. Thus is the power of an improving economy.

    • Major.Freedom says:

      Agreed, we don’t need central banks.

  4. Innocent says:

    Okay I have read E. Harding’s posts and I have to say I am confused by his take…

    Before the 80’s even WITH the recessions we were around 25% of GDP debt to GDP ratio… This is WHILE fighting wars in Korea ( Okay Military Police Action ) and Vietnam.

    Whereas until we had a group of people in congress say ‘no’ to increased spending in the 90’s ( around 94 if I remember correctly ) the Debt to GDP had been growing. Since you put the breaks on new spending things calmed down a little and even if you keep the debt level consistent ( adding a little to none each year ) economic growth will cause the debt to shrink.

    Until we decided to try to spend our way out of a recession in 2009 – 2011( yes some of that would have occurred because of a falling GDP 2008 – early 2009 )

    So here in lies my issue. I expect another recession to occur, albeit a minor one, sometime between the next 5 months to 2 years and five months. We are now at a 70%+ debt to GDP with an improving economy ( slow but sure ) I highly doubt, though I could be mistaken, that we are going to fall down to more than 60% before we go into recession again. Also I think that a great deal of the GDP increases has been because of several redefinition’s of GDP over the last 5 years.

    So several things. First, if there had not been fiscal tightening I would have expect the debt to GDP ratio to have increased not decreased, typically with fiscal tightening the Debt to GDP ratio moves down ( see 94 as an example ) Second, I think the reversal is going to be short lived as the Government will not tighten much more especially if there is a ‘new’ economic downturn. Lastly I can see the total debt going to above 100% in the next 10 – 15 years. This changes the dynamics of debt from when you are between 20% and 40% of GDP.

    Anyway, enough rambling, I just really did not see what Harding said as accurate or insightful… Please forgive me if that sound condescending I was simply confused at the conclusions you reached based on the chart and what has happened in the past 40 years….

    • Capt. J Parker says:

      E. Harding is partly correct. WWII and the Great Recession increased Federal debt a lot. But you make some points I agree with to some extent. As long as government lives within its means debt does not grow. Living within its means means a Federal deficit of something less than 3% of GDP. From WWII till 1980 we kept the deficit down and we paid down the huge WWI debt and fought Korea and Viet-Nam to boot. But all the while Federal spending as a percent of GDP was growing while tax revenue was flat at about 17% of GDP. Finally around 1980 we were running steady deficits in excess of 3% of GDP and the debt began growing. Record high interest rates from the early eighties till mid 90’s helped the debt build (As an aside I contend 2/3rds of the debt Reagan accumulated was from interest on the Trillion dollar debt he inherited.) Some small fiscal restraint finally brought the deficit below 3% around 1994 but I contend this was a long slow process that started back in 82. Now, we might enjoy a few years of modest deficits so the debt stabilizes but the CBO projects that come 2020 we will have 3% of GDP deficits and larger and that means the debt will grow with little end in sight. And, in the era of 2% real GDP growth we might need a deficit much less than 3% of GDP to contain the debt. I base my story on this busy picture of federal revenue and spending since 1960: https://flic.kr/p/CtByuQ (note that the debt/GDP line in my graph is total debt not debt held by public as in Dr. Murphys graph. I make no claim as to which is the better debt number to look at – its just the one I picked for my graph)

      • Zack says:

        Capt. J Parker,

        Good points. I’m always amazed at how many economists and commentators seem to miss the obvious when it comes to those (allegedly) huge deficits and spending increases in the 80’s. Look at the trend in real primary outlays during those years. It’s not exactly what most people would expect.

      • E. Harding says:

        “(As an aside I contend 2/3rds of the debt Reagan accumulated was from interest on the Trillion dollar debt he inherited.)”

        -If that was true, Reagan-era fiscal policy, especially during his first term, would have been even more shockingly tight than I thought. Of course, that had its roots in the Carter administration.

        It’s not real GDP growth that matters for the present purpose; it’s NGDP growth.

        • Capt. J Parker says:

          Please tell us how you define tight fiscal policy.

      • Innocent says:

        Lol, I was only talking about the time period of the chart. As far as WWII goes I am in complete agreement.

        This is also not total debt but debt held by the Federal Government. If you want you can look at

        https://research.stlouisfed.org/fred2/series/GFDEGDQ188S

        which has TOTAL public debt (sort of mirrors Federal since it is the biggest holder of debt ) and it has gone past the 100% mark…

        However I like your chart. I have always found it interesting that people think that having outlays north of 20% and inlays south of 18% are thought of as constructive.

    • E. Harding says:

      Before the 1970s, recessions were fairly mild. NGDP (the denominator) also grew much stronger before the early 1980s. Were it not for above-normal NGDP growth in the 1970s, the debt-GDP ratio would have grown much higher. See this example if you’re not convinced:

      https://againstjebelallawz.wordpress.com/2015/09/28/obvious-point/

      And the Republican Revolution had little net impact on the budget deficit.

      “Also I think that a great deal of the GDP increases has been because of several redefinition’s of GDP over the last 5 years.”

      -?

      “This changes the dynamics of debt from when you are between 20% and 40% of GDP.”

      -True. But this would be entirely the fault of a very tight monetary policy.

      “I just really did not see what Harding said as accurate or insightful”

      -I’m sorry, but it is both. Please see an ophthalmologist.

      • Innocent says:

        Lol,
        Well I do wear glasses. so yes getting to an ophthalmologist is always a great idea.

        Here is one of the things I meant as to calculation of GDP
        “Also I think that a great deal of the GDP increases has been because of several redefinition’s of GDP over the last 5 years.”

        http://seekingalpha.com/article/1368001-u-s-governments-new-way-of-calculating-gdp

        I am confused at what you mean by tight monetary policy. That is like saying, well if wishes were fishes. Sort of a non sequitur. Eventually the Fed should have to tighten ( although this has worked for Japan to date ). So yes if the Fed keeps interest Rates Really low (loose monetary policy), and we continue in the current trend of 20%+ outlays with 18%- revenue for the foreseeable future but we have a GDP growth of 3%+ Yes we will start to drop down in the debt to GDP ratio.

        However this is a pipe dream as the next recession will hit soon ( call it 5 months to 2 years and 5 months from now is when I am guessing ) and what will that do to the debt to gdp ratio… Oh I expect this next recession to be mild, but it will still cause our debt to GDP to go up another 15 – 30 points.

        Then the Federal Reserve CANNOT tighten… ever…Without causing massive issues… Barring we get growth of 5% per year ( unlikely ) with an inlay and outlay equal to one another.

        The actual projections from the CBO are that we will go from an average of 2.5% debt growth per year ( revenue – outlays ) to an average of 3.3% accelerating over a 10 year period of time.

        What I mean by that is the average for 2016 – 2020 will be 2.8% while from 2020 to 2025 will be 3.8%

        So no I do not see growth as a terribly viable method even WITHOUT a Federal reserve that does not tighten fiscal policy.

        so again I am sorry I do not ‘see’ your points. The thing that raises Debt to GDP no matter how you look at it is that there are larger outlays than revenue. This can happen over a long time period, say 50 years, or a short time period, say 3 years.

        Right now there would be no increase because the revenue – outlay is around 2.5% to 2.7%. Well the economy is growing at between a 2.5% – 3% growth rate right now. Viola equilibrium.

        So with the HUGE (sarcasm off) monetary tightening of the Fed ( which has not yet had time to really take effect as far as T-Bills go ( hence the interest rate the Government pays on its debt ) is negligible right now as they have been refinancing for the past 5 years.

        But here is the issue, the debt the Federal Government brings in is going to be larger than the rate of economic growth ( more than likely ) over the next 10 years. This means that even with loose monetary policy the Debt to GDP will most likely grow.

        anyway. Again I am not surprised that there has not been much growth to the Debt to GDP ratio over the last 3 years but more is around the corner. Yes due to a recession that is waiting to occur, but more so because the CBO says that unless we can be at a 3.5%+ growth rate we will be adding to it. In a developed country with limited population growth I do not see this happening.

        • RPLong says:

          E Harding, take notice of the fact that Innocent responds to your points without questioning your ability to read, think, or see.

          • E. Harding says:

            Well, my eyesight is extremely poor.

            “I am confused at what you mean by tight monetary policy.”

            -Slow NGDP growth caused by insufficiently fast monetary base growth.

            “However this is a pipe dream as the next recession will hit soon ( call it 5 months to 2 years and 5 months from now is when I am guessing ) and what will that do to the debt to gdp ratio… Oh I expect this next recession to be mild, but it will still cause our debt to GDP to go up another 15 – 30 points.”

            -That’s reasonable.

            “So no I do not see growth as a terribly viable method even WITHOUT a Federal reserve that does not tighten fiscal policy. ”

            -You mean monetary policy?

            “This means that even with loose monetary policy the Debt to GDP will most likely grow.”

            -How about a 4%-5% inflation target? I’m sure that would do something to help. Worked in the 1970s, when deficits were quite large.

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