By Joel Kurtzman, Senior Fellow, Milken Institute
Nobody is arguing that the national debt isn’t big. Sixteen-plus trillion dollars is a lot of money – roughly 102 percent of GDP. But does that mean it’s too big? If we only compare the size of today’s debt with what was owed in the past, $16 trillion seems like a lot. But is that the right way to determine if we should bring the government, and perhaps the country, to a halt by imposing sequestration? I don’t think so.
Whether our national debt is too big is a matter of affordability, not size. The kind of credit card debt many of us had in college, and which kept us up at night, is most likely far smaller than the amount of debt we would have to rack up today to have those same worries. That’s not because we worry less, it’s because we earn more.
Similarly, when financing the purchase of a car, whether the finance company grants us the loan is only partly determined by the price of the car; how much we earn and the size of our other debts are other key factors. If two people with the same income apply for a loan, one might get the loan and one might not, depending on whether they can afford more debt. Isn’t this how we should be approaching our national debt discussion, from the standpoint of affordability, and not simply size?
Our Debt Is Getting More Affordable
The affordability of our national debt is an issue that gets little attention. Fortunately, the Federal Reserve of St. Louis keeps track of how well the economy is handling our debt. It does so in the form of a chart that measures the percent of GDP devoted to paying interest on the nation’s debt. What that chart says is illuminating. According to the Fed, the percent of our nation’s GDP devoted to paying interest on the debt has fallen to its lowest level since 1973.
Presently, we spend roughly 1.4 percent of GDP to pay the interest on what the Federal government has borrowed. Since 1940, the largest share of GDP devoted to pay the interest on our debt was in 1990, when the U.S. spent roughly 3.25 percent of GDP on interest payments.
The share of GDP going to pay interest on the debt began falling in 1994. And, with the exception of the period of the Great Recession, has continued falling ever since. My guess is that if America’s credit rating was measured the same way consumers are measured when they finance the purchase of a car, we would get the car.
Of course, interest payments on our debt fell sharply because interest rates came down as a result of actions by the Federal Reserve to overcome the recession. But that’s not the only reason. The long-term reason our debt became more affordable is that the country has been growing steadily since the mid-1990s, except for the period immediately following the financial crisis. These two factors – growth and lower interest rates -- pushed down the country’s interest payments, as a percent of GDP, to levels not seen since Gerald Ford was in the White House.
With the threat of sequestration looming, there is a lot of argument about the size of the debt – and with good reason. But there is no discussion about whether a country our size, with a $15-plus trillion GDP, can afford the debt we have. Judging by the numbers, we can afford the debt we’ve taken on. After all, we’re not in college anymore.
Joel Kurtzman is a senior fellow, executive director of the Center for Accelerating Energy Solutions and publisher of The Milken Institute Review.