Home > Uncategorized > Putting the debt in context

Putting the debt in context

from Dean Baker

President Joe Biden’s recovery and jobs plans have led to considerable alarm over the resulting increases in the deficit and debt. Most of these concerns are misplaced.

The issue of whether a deficit is too large depends entirely on whether it causes us to push the economy too far, leading to inflation. The deficit for last year was $3.1 trillion, which was equal to 15.2% of GDP. This was by far the largest deficit, relative to the size of the economy, since World War II.

Yet, the inflation rate actually slowed in 2020, as the pandemic related shutdowns created an enormous gap in demand in the economy. It would be difficult to find any major sector of the economy that was operating near its capacity last year, and therefore raising prices.

The question going forward is whether President Biden’s spending proposals, coupled with his tax increases, are likely to push the economy so far that it will not be able to meet the demand created. That is not impossible, but it does seem unlikely. We have not seen a serious problem with demand generated inflation in more than four decades.

The other side is the burden created by the debt. There is huge confusion on this point, as people often get scared by politicians throwing around “trillions” of dollars. The numbers are huge, but so is our economy.

The latest projections from the nonpartisan Congressional Budget Office, which include the effects of President Biden’s recovery plan, but not his investment and jobs proposal, show the interest burden of the debt being 2.4% of GDP in 2031. By comparison, the interest burden was well over 3.0% of GDP in the early and mid-1990s. The idea that this burden will somehow bankrupt our kids is nonsense.

Furthermore, the people who complain about the debt almost never comment on the other ways that we create burdens for future generations. Most obviously, government-granted patent and copyright monopolies are an enormous burden. These monopolies raise the price of prescription drugs, medical equipment, computer software and other protected items by many thousand percent above their free market price. The burden in the case of prescription drugs alone is close to 2.0% of GDP, and rising rapidly.

If we want to talk seriously about burdens facing our children, the government’s debt is a tiny part of the picture. We will hand down to them a whole economy and society, including the natural environment. If we paid off the national debt, but left an economy in ruins and a devastated environment, we will not have done our children any favors.

  1. April 18, 2021 at 2:34 am

    The problem with deficits is assuming people have the smarts to spend play money when they can’t figure out how to quite burning existing money using big bulldozers in carcinogenic burn piles at hundreds of military bases, for example.

    Voted bonds is closer to a rational deficit economy if accurate information is used before voting. Experts and bureaucrats should be forbidden to even glance at deficit dollars. Somebody has got us into a big mess and it wasn’t the austeritized people.

    I’m not sure how inflation is calculated. Even so, I paid $2 for a large onion at the coop the other day. Okay, it was a big one and organic. Still, $2 for one onion. And somebody told me a 2 x 4 is $8. Inflation may only be going on for us little people. Hard to say. Plumbers? Don’t even think about parts for your heater. I don’t have academic stats but inflation feels like it’s on a roll in my world. Plus, if the price doesn’t jump, figure out what’s wrong. Chain saws for example, no longer have a gripper that digs them into the wood like a lever and they are so thin the word “Professional” is painted on, but they don’t cut straight.

    • Cristi C
      April 19, 2021 at 8:48 am

      Exactly. The real inflation is hidden by the faster replacement rate of the goods that are recorded for inflation basket. The chain saw is a good example. The manufacturers are reducing the durability of the products because that escapes inflation measurement. A chain saw that used to last 100 hours few years ago (due to higher quality steel which now skyrocketed) will last maybe 10 hours. Sure, its price is comparable but the inflation accountants cannot possibly measure that.

  2. John Hermann
    April 18, 2021 at 3:12 am

    I agree with this statement by Dean. The main thing I would like to add is that the AGGREGATE of Treasury securities on issue are not actually debt, because the aggregate never needs to be “paid back”. That is, it may be maintained in perpetuity, through the ongoing issue and retirement of actual securities. For this reason, I regard it as a form of broad state fiat money, rather than debt. It is freely interchangeable with banking reserves (which I would describe as narrow state fiat money). Moreover it should be recognized that the aggregate equals the net money supply (via mechanisms that I will not discuss here), and that to “pay back” this so-called debt amounts to destroying the money supply. Not necessarily a good idea.

  3. Edward Ross
    April 19, 2021 at 12:58 am

    In reply to deanbaker re the debt bogie from Australia i still believe that there is the Bretton Woods concept of sovereign currency and something like the fixed rate of a commodity as gold is something that needs to be considered. BECAUSE this would allow the creation of funny money to bolster the internal economy without creating debt to a foreign stake holder. I Also agree with Garrett Connelly because it reflects to the real world in a way that oridary people can understand. Ted

  4. Gerald Holtham
    April 20, 2021 at 5:42 pm

    Biden is giving a lot of poor people some money and he is creating employment with deficit dollars because he doesn’t want those poor people voting for Trump or for gerry-mandering, vote-suppressing Republicans in two years time. Sounds like a good cause to me.

  5. Gerald Holtham
    April 20, 2021 at 5:44 pm

    Edward, it does no service to ordinary people to tell them something they can understand but that happens to be wrong. John Hermann is nearer the mark.

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