The debt bomb
One of the most important economic ratios involves the relationship between gross federal debt (i.e., the national debt) and gross domestic product (GDP), which represents total economic output. A declining debt/GDP ratio generally means that the economy is growing faster than the national debt. When that trend persists over time, the result is that the burden of the national debt becomes smaller and smaller, relatively speaking. A rising debt/GDP ratio generally means that the national debt is growing faster than the economy. When that trend persists, the result is that the burden of the national debt increases.
At the end of fiscal 1941, the debt/GDP ratio was 50.4 percent, and the national debt stood at $57.5 billion. Five years later, following the end of World War II, the debt/GDP ratio peaked at 121.7 percent as the war-related national debt soared to $271 billion. Over the next 35 years, except for an occasional blip, the debt/GDP ratio steadily declined until it reached its lowest postwar level of 32.6 percent in 1981. Between 1946 and 1961, for example, while the national debt nominally increased from $271 billion to $292 billion, the economy grew so much faster that the debt/GDP ratio plunged to 55.1 percent. Moreover, just as the ratio had fallen significantly during the Korean War (from 94.1 percent to 71.3 percent), it also declined during the Vietnam War, falling from 51.8 percent in 1963 to 35.7 percent 10 years later. As noted, at the end of fiscal 1981, even though the national debt had reached $1 trillion, the post-World War II debt/GDP ratio reached its nadir at 32.6 percent.
From 1981 through 1996, soaring, persis- tent budget deficits contributed to an exploding national debt. The national debt was further augmented by borrowing the surpluses from numerous trust funds (Social Security, Medicare, federal-employee and military retirement funds, etc.). Between the end of the 1981-82 recession and 1996, only a brief, mild recession interrupted generally very robust growth of the U.S. economy. Even so, the unified budget deficits and the borrowing from the trust funds were so massive that the debt/GDP ratio soared from 32.6 percent in 1981 to 48.1 percent in 1986, 60.6 percent in 1991 and 67.3 percent in 1996, when the debt/GDP ratio reached its cyclical peak. The corresponding levels of the national debt massively increased from $1 trillion in 1981 to $2.1 trillion in 1986, $3.6 trillion in 1991 and $5.2 trillion in 1996.
In 1998, the federal budget produced its first unified surplus since 1969. By fiscal 2000 the unified budget surplus was $236 billion. After rising by nearly $1.2 trillion during the 1993-1996 budget period (from $4 trillion at the end of fiscal 1992 to $5.18 trillion at the end of fiscal 1996), the growth in the national debt sharply decelerated during the next four years. The national debt increased by less than $500 billion during the 1997-2000 budget period. In fact, the fiscal 2000 unified surplus was so large that it nearly offset the trust-fund borrowing that year. Thus, the national debt increased a relatively infinitesimal $23 billion in fiscal 2000, reaching $5.63 trillion.
By 2001, the debt/GDP ratio fell to 57.4 percent, having plunged nearly 10 percentage points in five years. Over the next six years, however, unified budget deficits achieved record nominal levels, and borrow- ing from trust funds reached fiscally epidemic proportions. During the last six years, the national debt increased by a staggering $3.25 trillion, or 56 percent. The national debt now exceeds $9 trillion. Because the economy has been growing much slower than the national debt, the debt/GDP ratio is now about 66 percent, nearly 10 percentage points higher than just six years ago.
The Bush administration and congressional Republicans have spent the past several weeks celebrating the fact that the unified budget deficit for fiscal 2007 ($161 billion) was 1.2 percent of GDP. But that ratio has become increasingly misleading in recent years because the annual increase in the national debt has dwarfed the unified budget deficit and the nominal growth rate of the economy. While cumulative unified budget deficits during the past five years have astoundingly exceeded $1.5 trillion, the cumulative increase in the national debt over the same period has been a much more mind-boggling $2.8 trillion. That is nearly double the cumulative increase in the more widely reported budget deficits, which have become increasingly less important (relatively speaking) than the change in the national debt.
After reaching a minuscule 0.24 percent in 2000, the ratio that measures the annual increase in the national debt to that year’s GDP has averaged 4.63 percent during the last five years. That trend should not be occurring during an economic expansion, and it raises the question: Just how robust would the economy have been during the past five years without the federal government’s borrowing binge, which has produced a fiscal disaster?
Meanwhile, if the first Baby Boomer was conceived on V-E Day, then she will become eligible for Social Security next February and Medicare three years later. Moreover, the Bush administration’s updated five-year (2008-2012) budget blueprint, which is riddled with crazy, self-serving assumptions (such as this gem: The cost of its Global War on Terror will decline from nearly $200 billion in 2008 to $50 billion in 2009 and zero thereafter), still manages to project another $2.5 trillion increase in the national debt. It’s going to get a lot worse before it gets better.