Federal Debt Is Not As Bad As You Might Think

The federal government has once again run up against its borrowing limits, and it’s going to be Silly Season in Washington DC for the next few weeks. The debt limit will obviously have to be raised, but at what cost? None, according to the Democrats; spending discipline according to the Republicans. Sadly, both parties are complicit in the larger problem: Congress continues to spend money like a drunken sailor, and it has been ever thus, as the charts below show.

Chart #1

Chart #1 shows the staggering growth of federal debt held by the public, which is now $24.6 trillion. It is not $31.5 trillion, as many claim because that figure includes money that Treasury has borrowed from social security and other government agencies. What the government owes itself is irrelevant; what matters is what our government owes to the public. As the chart shows, debt has been growing at about a 9% annual rate for the past 50+ years. This is not a new problem. (Note: the y-axis is logarithmic, so a straight line equates to a steady rate of growth; a steeper line equates to increases in the rate of growth.) Debt in the past (e.g., mid-1980s, and 2009-2012) has grown at much faster rates than it has recently.

Chart #2

Fearmongers prefer to compare the size of federal debt to the economy, which is what Chart #2 shows. On this basis, the size of our debt today is greater than at any time since World War II. It’s almost equal to our annual GDP. Yikes! But it’s not nearly as bad as this would lead you to think.

Chart #3

The “burden” of debt is not the nominal amount, nor is it the size of the debt relative to GDP. The true burden is the cost of servicing the debt, which is a direct function of the level of interest rates. As Chart #3 shows, the size of our debt is indeed huge, but interest rates are historically low. Let me point out a curious fact: a rising debt/GDP ratio tends to coincide with falling interest rates, and a falling debt/GDP ratio tends to coincide with rising interest rates. Not what you’ve been led to believe, I’m sure.

Chart #4

Chart #4 shows the true burden of our debt, which is the cost of servicing the debt as a percent of GDP. That makes sense for the government, just as it makes sense for those who buy a house with a mortgage: what is your monthly mortgage payment as a percent of your income? A bigger economy can easily handle higher debt loads. But rising interest rates added to a very large nominal debt can be explosive. Fortunately, we’re not there yet. In fact, the current burden of our federal debt is historically rather low. Sure, it’s going to be rising by leaps and bounds in the years to come if interest rates continue to rise and the government continues to borrow. But maybe we’ll get lucky (once again) and Congress will rein in spending and inflation will return to the Fed’s target without the Fed having to jack rates to the moon. Our debt burden was about 60% larger in the 80s and 90s than it is today, and the sky never fell.

The big reason debt rose so much was spending. In the 12 months ended February 2020, federal spending was $4.6 trillion. In the 12 months ended December 2022, federal spending was $6.3 trillion, up 1.7 trillion (36%) from Feb. ’20. Taxpayers couldn’t keep up the same pace, but the results may surprise you: in the 12 months ended February 2020, federal revenues were $3.6 trillion. In the 12 months ended December 2022, federal revenues surged to $4.9 trillion, up $1.3 trillion (+36%).

Chart #5

Chart #5 sums it up. Spending in the Covid years exploded, far outstripping the ability of surging tax collections to keep up.

Chart #6

Chart #6 puts things into even better perspective. As a percent of GDP, tax revenues today are somewhat higher than their post-war average, but spending remains extremely high relative to its post-war average. Taxpayers are not responsible for our towering debt – Congress is.

No amount of tax increases can fix our problem. We need to rein in spending!

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.