The purpose of this article is to put the concerns about the US federal debt into perspective. U.S. federal debt has grown significantly both in dollar terms and relative to U.S. gross domestic product (GDP), but history suggests that federal debt is unlikely to have a major impact on federal policy and spending. until the interest charges become a much higher share of federal spending. The data for this article comes from the Federal Reserve in St. Louis. Follow-up articles will examine related topics of US interest rates and the US labor market.
US federal debt since World War II
As of June 30, 2021; The US federal government debt stood at $ 28.4 trillion (see Figure 1). The growth rate increased dramatically in the mid-1970s. Annual growth has averaged 9.1% since 1975 compared to 2.3% from 1946 to 1975. Since 1975, Republicans have been president for 24 years; Democrats 21 years old. Democrats (Republicans) controlled 12 (10) 2-year sessions of the Senate. The breakout is the same for home control.
Ratio of US debt to GDP
Another key measure of public debt is its ratio to GDP. This ratio declined steadily after World War II, reaching a low of 31% in 1974 (see Figure 2). The ratio started to increase in 1982. After peaking at 55% – 65% during the period 1990-2007, the ratio has since doubled to reach 123% as of June 30, 2021. Two major economic disruptions largely explain but not all of this doubling: (1) the 2008-2010 US housing crisis and associated recession and (2) the COVID-19 pandemic beginning in early 2020.
Federal interest expenses
Current conventional economic wisdom is that concern about public debt is accompanied by interest payments on the debt. Not surprisingly, given the growth in the federal public debt, federal interest spending has also increased (see Figure 3). Federal interest spending is 15 times higher in 2021 than in 1975; Federal public debt is 49 times higher. Compared to 2007, federal interest spending in 2021 is 1.5 times higher while federal government debt is 3.1 times higher. The difference in the growth of interest spending and the federal debt reflects the long-term decline in interest rates that began in the early 1980s.
Ratio of Interest to Total U.S. Federal Expenses
The ratio of interest expense to total US federal spending since fiscal 1940 falls into two regimes (see Figure 4). From 1980 to 2000, the ratio averaged 13.5%. In all other years since 1940, the ratio has averaged 7.2%. The 1980-2000 regime was a time when federal debt and budget deficits were major constraints on US policy and spending, as various laws were enacted to limit the increase and / or reduce federal spending. In 2021, interest represents 5.2% of total federal spending. This ratio is likely abnormally low due to the huge spending on COVID 19 relief. However, even in 2019, the ratio was 8.4%, still significantly below the 1980-2000 level.
Since the mid-1970s, the United States has pursued a policy of increasing the national debt, whether measured in dollars or relative to GDP. This increase has transcended Republican and Democratic control of the Presidency and Congress.
U.S. federal assistance for COVID is important, but not irrelevant in the post-1975 context.
Despite the growth in US federal spending after 1975, falling interest rates have meant that the current ratio of US interest spending to total US government spending is below its long-term average.
More importantly, the ratio of federal interest to federal spending does not suggest that US federal debt, specifically interest spending on debt, will have a substantial impact on US policy and spending in the near term, unless Interest spending does not increase significantly as a proportion of total federal spending.
Debt in itself is rarely the only cause of economic stress. Economic stress usually arises when high debt is accompanied by an unexpected negative event. A key potential risk for the United States is an increase in interest rates resulting in higher federal interest payments that impact training and spending related to federal policy. A follow-up article will examine the US interest rate environment.
The data source
Federal Reserve Bank of Saint-Louis. 2021, December. Federal Reserve Economic Data (FRED). https://fred.stlouisfed.org