How did we get $32 trillion in debt?

Your high school teachers probably didn’t tell you how big a role the national debt has played in American history.

President Biden and Speaker McCarthy met Wednesday to begin talking about next year’s budget, future policies on taxing and spending, and raising the ceiling on the national debt — which Treasury Secretary Janet Yellen says has already been reached and will become a crisis in a few months, probably by June.

Biden and McCarthy each framed their meeting differently. McCarthy presented it as the beginning of a negotiation over raising the debt ceiling, while Biden insists that (while he is eager to discuss the other issues), he will not pay ransom to House Republicans to avoid sending the United States into default.

President Biden made clear that, as every other leader in both parties in Congress has affirmed, it is their shared duty not to allow an unprecedented and economically catastrophic default. The United States Constitution is explicit about this obligation, and the American people expect Congress to meet it in the same way all of his predecessors have. It is not negotiable or conditional.

We probably haven’t heard the last of this issue, so I think it’s worth spending some time to get past the slogans and talking points. Four weeks ago I explained what the debt ceiling is, and came to the conclusion that it shouldn’t exist at all. The US and Denmark are the only countries that have a formal debt ceiling, and Denmark doesn’t play politics with its ceiling the way we do. In essence, the debt ceiling is a self-destruct button built into our government. Pushing the button would benefit no one, except possibly our enemies (though I doubt even China wants to see us default on the bonds it holds). But politicians can threaten to push the button (as McCarthy and his caucus are threatening now) to try to extract concessions. In essence, McCarthy is like the terrorist who hijacks an airliner and threatens to blow up the plane he is on unless his demands are met.

There is also good reason to believe that the Republicans are not acting in good faith, as I have regularly suggested in weekly summaries. They painted the national debt as an existential threat to America’s future during the Obama administration, and then conveniently forgot about it for four years under Trump. Now that Democrats have the White House again, debt is back to the top of their agenda.

But even after we recognize the bad faith and illegitimate tactics, we shouldn’t just ignore the issues Republicans are raising. (Once in a while, the airline terrorist might have a legitimate point, and his demands might be worth considering after the plane and its passengers are safe.) The strength of the Republican position politically is the American people’s intuition that this can’t go on forever. We can’t keep piling up trillions of new debt every few years. Or can we? What would go wrong if we did? And what warning signs should we be looking for, to know if or when we’ve pushed the debt too high?

I don’t want to obsess over this topic, but if Janet Yellen is right we have a few months to think about it before the crisis hits in June. So I have a series of articles planned, which will come out sporadically between now and then. The first was the debt-ceiling post I already mentioned. In this second post, I’ll look at the history of the national debt, which plays a bigger role in America’s story than your high school teachers probably led you to believe. (In general, high school history is bad at weaving economic history into its larger narrative.)

In later posts, I’ll talk about the various impacts people expect the national debt to have, and whether any of their predictions have manifested or show signs of manifesting anytime soon. And finally I’ll discuss what we might do if we were actually serious about getting the debt under control.

So let’s look at history:

English debt and colonial taxes. Prior to the Great Depression, just about all economists believed that government debt should be temporary. Once in a while, it was inevitable that some extraordinary event (like a war) would require more spending than a government could reasonably collect in taxes, and then it made sense to borrow. But once peacetime came, that debt should be repaid to quickly as possible. Big powers did not always do this, but that was a bad practice symptomatic of a failing state.

As we’ll see, it’s almost impossible to separate ideas about government debt from ideas about what money is. In the era of the American colonies, and for some while afterwards, money was gold or other precious metals. So when England took on debt to pay for the Seven Years War (1756-63, a conflict which included the French and Indian War in North America), the King was borrowing physical gold from people who owned it. (Today, we often forget the consequences of gold’s physicality. For example, rebuilding San Francisco after the earthquake of 1906 involved American and British insurance companies paying enormous claims. Gold had to physically move from London and New York to the West Coast, creating monetary shortages that led to the financial panic of 1907. The US created the Federal Reserve in 1913 largely to avoid similar monetary problems in the future.) (I’ll bet your high school American History class never connected the Fed to the San Francisco Earthquake.)

England’s attempt to repay its war debt led to the Stamp Act of 1765 and other taxes on the American colonies. This was part of the “taxation without representation” that brought on another war, the American Revolution.

As the American Revolution was happening, Adam Smith was revolutionizing economic thought, particularly the idea that national wealth meant the accumulation of gold. If gold were truly wealth, then the richest country in the world would be Spain, which had extracted huge amounts of precious metals from its American colonies. But instead, it had been England that prospered. A large chapter of The Wealth of Nations was devoted to urging England to rethink its colonial policy, particularly with regard to India. What if, rather than trying to extract goods, England managed India with the goal of creating a vibrant economy?

The ten-dollar founding father. One of the United States’ first political battles was over how to handle the debts of the Revolutionary War. Alexander Hamilton, the first secretary of the Treasury, had a fairly modern vision of the role government bonds could play in a banking system, as well as an expectation of the role foreign investment would play in developing the resources of the American continent. So he wanted the state war debts consolidated into a national debt, which he would be in no hurry to pay off, beyond keeping up interest payments.

Thomas Jefferson, whose battle with personal debt lasted his entire life (and was one of his excuses for why he couldn’t free his slaves), took a more traditional view:

Hamilton’s plan was highly criticized, most notably by Thomas Jefferson, who wrote to Washington in 1792 complaining about Hamilton’s ideology, “I would wish the debt paid tomorrow; he wishes it never to be paid, but always to be a thing where with to corrupt & manage the legislature.”

War debts. Jefferson’s successor James Madison pulled the plug on Hamilton’s Bank of the United States in 1811. But then the War of 1812 drove the national debt to the previously unimaginable sum of more than $100 million. Managing that debt led to the creation the Second Bank of the United States in 1816. Andrew Jackson liquidated the second bank in 1836, and used the proceeds to pay down the national debt (the last time the US has been virtually debt-free). That move created a sudden contraction in the money supply, leading to the Panic of 1837 and a subsequent depression. (The panic, in turn boosted American emigration to the new Republic of Texas. Southerners who had borrowed to buy land and slaves, and now could not repay those debts, could let the banks reclaim their land, but take their slaves to Texas where creditors could not follow them.)

Repaying debt as soon as feasible was still the conventional wisdom during and after the American Civil War. The war cost the United States about $5.2 billion, an awesome sum in those days. That cost was financed partly by borrowing; the national debt rose from $65 million to $2.6 billion. In addition, the government issued about $400 million in paper money not backed by gold or other precious metals, known as “greenbacks”.

This was widely seen at the time as a bad practice that only an emergency could justify, so after the war the government began gradually paying down the debt (to $2.4 billion by 1870 and $2.1 billion by 1900) and (more quickly) withdrawing the greenbacks from circulation. Once again, the result was a deflationary contraction that centered on the Panic of 1873, but continued for several years after — basically, a preview of the Great Depression. (Lots of events that show up in high school US History textbooks stem from this national trauma. One reason Reconstruction ended in the 1870s was that economic problems closer to home caused Northern Whites to lose interest in Southern Blacks. Subsequent fights over currency and coinage led to the Free Silver movement and William Jennings Bryan’s famous “Cross of Gold” speech in 1896.)

The debt leapt again during World War I, reaching $27 billion, but decreasing to $17 billion by the start of the Great Depression. (The numbers from my various references don’t match exactly, but do agree on general trends. I’m not sure why.)

Keynes and the Fed. After the Depression and World War II, when the debt exploded to $270 billion, John Maynard Keynes formulated a new theory of how governments should handle debt, focusing his attention on the business cycle rather than the war/peace cycle. Keynes saw capitalist economies as plagued by boom-and-bust cycles caused more by human behavior than by external forces like flood or famine. Government spending, in Keynes’ view, should be a counterweight to those cycles: In bust times, when everyone is hoarding their resources against an uncertain future, the government should borrow and spend to keep the economy moving. In boom times, when people are spending freely and borrowing against anticipated income that may never appear, the government should slow things down by running surpluses and paying off debt.

The Federal Reserve plays a similar role by managing the money supply through the banking system. It expands the money supply and lowers interest rates during busts and does the opposite during booms. (One fed chair said his job was to “order the punch bowl removed just as the party was really warming up”.)

The Fed era, and the abandonment of the gold standard in 1971, led to a new understanding of what money is. Today, dollars are no longer based on anything in particular. You can exchange a dollar for some other currency, but if you want gold or silver (or bitcoin), you’ll have to pay the market price, which varies wildly. Nixon is widely believed to have said “We are Keynesians now.” He could just have accurately have observed that all dollars are now greenbacks.

Today, dollars are little more than the way the international monetary system keeps score, and the Fed can create dollars simply by changing the numbers in its spreadsheet. This is why it is nonsense to talk about the US “going bankrupt” in any other way but Congress refusing to allow the Treasury to pay its bills (i.e., what McCarthy is now threatening). The US owes dollars, and dollars are whatever the Fed says they are. Worrying about the Fed running out of dollars to buy bonds from the Treasury is like worrying about the scoreboard at the Super Bowl running out of points.

The ultimate threat of fiscal irresponsibility (which we’ll get into in the next post in this series) is not national bankruptcy, but inflation combined with the much vaguer threat of people and countries and corporations choosing to drop out of the dollar-denominated economic system.

Similarly, Japan is not going bankrupt, because it owes yen that are defined by the Bank of Japan. Things are a bit more complicated for members of the European Union, because the individual members owe euros, which are defined by the European Central Bank, controlled by EU as a whole. (That’s how Greece got into trouble during the Great Recession. The ECB could have loaned Greece any number of euros, but chose not to.)

It has always been politically easier to increase spending and cut taxes than to cut spending and increase taxes, so in practice Keynesianism resulted in a slow-but-steady increase in the national debt, from $255 billion in 1951 to $475 billion in 1974. The Ford/Carter “stagflation” years pushed the debt up to $900 billion by 1980. Then came the Reagan-Bush years, when supply-side economists like Arthur Laffer promoted the (false) theory that tax cuts would pay for themselves by stimulating economic growth. (Laffer is still around and still preaching nonsense. There is a theoretical level at which high taxes so totally stifle an economy that cutting them would produce more revenue in the long run. But there’s no evidence American taxes are anywhere near that level, which is why tax cuts keep leading to deficits.)

The Clinton surplus. Because cutting taxes actually decreases revenue (duh), by the time Clinton took office in 1993, the debt was over $4 trillion and increasing rapidly. (Bush’s last budget, FY 1993, showed a $255 billion deficit, down from a then-record of $290 the previous year.) Bill Clinton and Republican House Speaker Newt Gingrich both saw the deficit as a problem, so a combination of restrained spending and increased taxes lowered the deficit every year, until FY 2000 showed a $236 million surplus. Clinton’s last budget, FY 2001, had a $128 billion surplus, and no annual federal budget has been in surplus since. (The Clinton/Gingrich plan refutes the Republican mantra that raising taxes can’t be part of deficit reduction, because Congress will just spend the new revenue. A combination of higher taxes and spending restraint is the only method that has ever successfully brought the budget into balance.)

Partly the Clinton surplus disappeared for Keynesian reasons, in response to the dot-com-bust recession of 2001. But also supply-side economics was back, and Bush II viewed tax cuts as a universal remedy for any economic ill. So the deficits did not disappear as the economy recovered, setting a new record of $413 billion in FY 2004, and still at $161 billion in FY 2007.

Trillion-dollar deficits. So a large structural deficit was already built in to the federal budget when the Great Recession started late in 2007. The FY 2009 budget deficit was already projected at over $1 trillion when Barack Obama took office in January of 2009, and his Keynesian stimulus package pushed it up to $1.4 trillion. Obama’s trillion-plus deficits of FY 2010 and 2011 were similarly justifiable in Keynesian terms, and they began to decline after the recession ended, getting down to $442 billion by 2015. The increases of the final Obama years were less justifiable, but Obama handed President Trump a growing economy and a $665 billion deficit in FY 2017.

Once again, though, tax cuts were supposed to pay for themselves and didn’t, so Trump proposed (and his Republican allies in Congress voted for) large and growing deficits in boom times, reaching $984 billion by FY 2019, the budget year that ended in September 2019, four months before the Covid pandemic hit the US.

When Covid shut down much of the economy, massive government spending prevented the cascading bankruptcies that characterized the “panics” of the pre-Keynes era. So Trump should be cut some slack for the $3.1 trillion deficit of FY 2020 and Trump/Biden should similarly catch a break for the $2.8 trillion deficit of FY 2021. Biden then cut the deficit to $1.4 trillion in FY 2022, and the current year, FY 2023 (ending September 30), is projected to have a $1.2 trillion deficit.

And that’s how the national debt arrived at the current debt ceiling of $31.4 trillion in January.

What harm does the national debt do? Intuitively, it seems like owing money can’t be good, and the bigger the debt, the worse it should be. But most people’s intuition is based on their experience of household finance, which differs from the US government’s situation in important ways (like that the government controls the currency it owes). So over the decades, repeated predictions of debt-induced apocalypse have not been fulfilled, to the point that it becomes hard to take them seriously.

I’m sure that if we could go back to, say, 1990, and tell economists then that the national debt would be $31.4 trillion in 2023, (rather than the $4 trillion they owed then), many would refuse to believe us. Surely the sky would fall long before the debt reached that level. And if it hasn’t fallen yet, what makes us think it ever will?

At the same time, though, people who model things have learned to be wary of infinity. The universe is full of patterns that work up to some point, but then stop. In aerodynamics, things change as you get close to the sound barrier. Air friction doesn’t seem like a big deal when you run, but if you fall from space it might burn you up. In physics, laws that seem perfectly sound in everyday life start failing near the speed of light. Maybe there’s something like that in economics, so that debt does no harm until some point X, and then things start to go wrong.

But where would X be? Measured in what units? And can we get any more specific about the “things” that might start to go wrong?

Those questions are where the next post in this series will begin.

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  • Robert Manning  On February 6, 2023 at 12:00 pm

    thank you, Doug, for your very intelligent and helpful analysis of how we got to this point. There were a lot of disastrous policy and political decisions between say, 2000, and now that led us here, too many to mention, I suppose.

  • Creigh Gordon  On February 6, 2023 at 12:30 pm

    The Clinton surplus disappeared because a recession started in March 2001, in no small part because of the Clinton surplus.

    Between fiscal years 1998 and 2000, the Government taxed about a half a trillion dollars more than it spent. That half trillion came out of people’s savings (it had nowhere else to come from) and we were half a trillion poorer in savings. At first, that didn’t have much effect, because most US financial assets are not US dollars, they are privately issued promissory notes (e.g. bank deposits backed by mortgages and other loans) that are payable in US dollars. In addition, many of us felt rich due to the dotcom boom, but in March 2000 the stock market started a steep decline and soon the ugly question of where the US dollars were going to come from to pay off those promissory notes raised its ugly head. At that point people started cutting back on spending, and GDP fell (definition of a recession). The NBER declared the recession official in March of 2001, two months into GW Bush’s presidency. Fortunately, Bush had an answer: tax cuts, the stopped clock of Republican fiscal policy. The tax rebates ($300 for singles and $600 for households) were sent out and spent, and GDP went back up and the recession was over.

    • Dale Moses  On February 6, 2023 at 5:56 pm

      This is dumb and refutes itself. the dot com bubble was a bubble. Bubbles occur because of an EXCESS of savings. Too much savings chasing too few return opportunities. -> bubble. Bubble crashes and over corrects -> financial recession.

      But here you argue that the Clinton surplus resulted in reduced savings and that “too little savings caused too much investment”. No. Bad. Wrong. S=I. If S goes down I goes down. A surplus driven recession must be a “slow” recession and not a public market crash. It is driven by a reduced supply of investment reducing the ability of the public system to expand. This would look a lot like a supply driven recession like the stagflation of the 70s (because investment is supply of new capital, existing capital would be chasing input goods and prices would rise as demand exceeded supply)

      But this did not happen. And so it is not as you say.

      • Creigh Gordon  On February 6, 2023 at 11:51 pm

        Net savings of the private sector consists of US dollars created by the Federal Government and paid to households and businesses for goods and services, which have not yet returned to the Treasury as tax payments. Most financial assets of the private sector are not US dollars, they are promised payments of US dollars from households and businesses that are due to other households and businesses. These privately promised payments, which exist in far greater amounts than US dollars, net to zero for the private sector as a whole. When the Government runs a deficit, it pays more than it taxes and increases the private sector’s stock of US dollars. When the Government runs a surplus, it decreases the private sector’s stock of dollars, and makes it harder for private debtors to pay private debts. During the dotcom boom, many people felt wealthy and were very comfortable with the idea of running up debts. After the bust, they wanted to pay off debts. But because of the Federal Government’s budget surplus, US dollars were harder to obtain. The result was great incentive to cut private spending, and since GDP is really just total spending, GDP fell.

        During the dotcom boom, sellers were typically paid with a bank deposit transferred from the buyer. But bank deposits are mostly privately promised payments from the bank; the bank’s promise is only partly backed with US dollars (its reserves). Mostly the bank’s promise is backed by future payments to the bank from mortgages and loans outstanding, which in turn are payable with US dollars. This whole system depends on availability of US dollars (net savings) which are reduced by Government budget surpluses.

        I did not argue that “too little savings caused too much investment”. My entire argument is that Government surpluses reduce private savings, and reduced private savings makes paying private debts harder and recessions likelier. I also do not believe that savings = investment. Most investment is financed by private debt.

      • Dale Moses  On February 7, 2023 at 12:48 pm

        Well gordon you’re simply wrong that S=\=I. You’ve written a lot of stuff that sounds smart but has little basis in reality.

        Like. Money supply is partly determined by surplus but it’s not uniquely determined. And it’s money isn’t only specific US tender in dollars.

        You are correct in that changing consumption/investment decisions (during the recession people want to pay down debts, which reduces consumption and this increases available investment) is one of the thing that happens in a recession but this is not caused nor exacerbated by a surplus because money supply is relative to the prior state of the economy. If people thought money was loose enough to loan/borrow then fiscal policy was currently loose enough for the state of the economy.

        This doesn’t mean after a crash that keeping a surplus is good, Bushs cash injections were fine. (But his tax cuts were not temporary and that is not fine!). But it does mean that the government surplus that “crowded out private investment” or “reduced money supply so hard people did not have the money to invest” didn’t cause the stock market to overheat and then collapse.

      • Creigh Gordon  On February 8, 2023 at 8:58 am

        So I looked up S=I in the ol’ textbook. Here’s the simple case derivation: (this comment should be at the bottom of the thread…)

        Saving is national income minus consumption: S = ni – c

        National income equals national product: ni = np (Wut? but carry on…)

        National product is consumption plus investment: np = c + i (from this we see that i is what’s left over from production after consumption, or, inventory buildup)

        Substituting, S = c + i – c; or S = i: that is, for this simple case saving equals inventory buildup. This is true but:

        a. Trivial

        b. Inventory buildup is not what people usually mean by investment, which would be more like R+D, building a factory or mine or road, planting a crop.

        c. Inventory buildup is not what I was referring to when I referenced (net) savings way up above, which would be more like “pile of money available for paying off debts.”

        So if you interpret S=I to mean pile of money = R+D/factory building/crop planting, this just doesn’t make sense.

  • Eric  On February 6, 2023 at 1:15 pm

    Entitlement spending is the largest driver of the national debt. Medicare i.e. is the Second largest budget item in the federal budget, at about 700 Billion dollars a year. In 2020 it was 13 percent of the total federal budget. The Medicare budget goes up at about Three percent a year. This is unsustainable. Medicare will go broke in 2028.

    Creating a national marketplace and expanding Part C, the private part of Medicare would reduce overall deficit spending and debt.

    • carolannie1949  On February 6, 2023 at 2:59 pm

      SS is not a driver of the national debt. The general budget, which does not include SS, drives the national debt. SS is a separate fund.

      • Eric  On February 6, 2023 at 4:34 pm

        The deficit of social security from payroll taxes, which is about Twenty Five percent, is funded from the General Treasury fund. This fund is funded by selling Treasury notes; which is part of the national debt. A great accounting trick!

    • Dale Moses  On February 6, 2023 at 6:02 pm

      This is not unsustainable. 3% is about what inflation is (indeed almost exactly because this spending is CPI indexed).

      So a steady tax rate and a steady GDP (which is and should actually be increasing) would produce a zero percentage change in this spending. This is sustainable.

      There is a “deficit” in this spending but it was an accounting trick functionally. Because for years there was a “surplus” and the federal govt used this money. It knew that there would be a deficit later and correctly decided that this would best being used rather than destroyed. This is fine actually. And the “deficit” will probably correct itself when population levels even out. And even if it “doesn’t” it’s not even really an issue.

      • Eric  On February 6, 2023 at 7:04 pm

        Dear Dale:

        I’ve got Medicare going to 829 Billion in 2025 and or about a Six percent growth rate in the next Five years Medicare will be at 1.8 Trillion in 2032 due to the growth in the ageing population and overall health care costs.

        The political debate in the coming years will be how we divvy up these costs. Will more of the burden fall on beneficiaries or will it fall on taxpayers.

        I suspect that Congress will deficit spend in the short term, thus driving up the national debt further in the long run bringing us further to the brink of some type of default.

    • Thomas Paine  On February 7, 2023 at 3:34 am

      The largest driver of the national debt is the refusal to set tax rates sufficient to cover the spending Congress and the POTUS approve.

      The second largest driver of the national debt is the Defense Department budget. In the most recent spending bill, Congress gave the Pentagon ~$45B more than it requested, bringing the latest FY spending up to $858B. If Congress isn’t willing to properly fund its spending, but instead decides to address debt by reducing spending, this is the place to start. The US spends more than the next 20 nations – including China – combined on what’s euphemistically called “defense”, and is really mostly a security force for private corporations doing international business and a weapons slush fund. There’s also the estimated $250B in outright waste that gets burned each year.

      Blaming “entitlements” is an excellent example of pejorative political rhetoric, which seeks to immediately delegitimize the spending choices we make as a nation for the benefit of its citizens because on its own, our nation’s economic system fails to adequately provide enough for a fair slice of the body politic to survive, and especially so in old age. The Wal-Marting of America and the shift to a gig-based service economy with no benefits or employment security for most has only exacerbated this.

      Medicare is by far the most efficient system of paying for medical care, primarily because its administrative costs are ~4% of premiums, while private insurance consumes 25-33% of them, as well as the purchasing/negotiating power of such a large coverage pool. By simply lowering the qualification age to -9 months (as soon as pregnancy is detected) and redirecting the inexcusably large premium dollars that now go directly to private, for-profit insurance companies, our nation could completely fund Medicare for essentially forever and also give every family in America an extra $400-500 / month. But since this would cost some c-suite suits their jobs and significantly reduce share value in those companies, it’s going to be next-to-impossible to get Congress to do what’s best for Americans instead of what’s best for those who profit from our current ‘health’ insurance racket.

      That private insurance companies can turn a profit simply by taking one’s Plan B premium from Medicare and providing even better coverage than straight-up Medicare provides tells us that there’s plenty of room left in this system, room that will only get bigger once the insurance pool includes substantially healthier people of much younger ages. But, of course, private companies don’t want to give them up because collecting premiums on people who aren’t likely to need the insurance is where all the gravy is.

      Other ways to improve Medicare would be to allow Medicare to negotiate all drug prices since it buys in bulk, which is why Republicans explicitly forbade this when Part D was created under Dubya; to cap the out-of-pocket risk of straight-up Medicare so Plan C or Medigap coverage from a private insurance company isn’t needed; and to simply bring programs such as Silver Sneakers into the program instead of forcing them to align with private companies.

      The US is the wealthiest country, by far, on earth. It’s beyond inexcusably shameful that it’s the only developed country that doesn’t provide some form of single-payer/public option, and the only reason it doesn’t is pure, simple greed.

      • Larry D Benjamin  On February 7, 2023 at 6:54 am

        The US has the highest GDP of any country, so it makes sense that we spend more on defense. A more instructive way to look at it is as percentage of GDP. At 3.2%, we’re third, after Saudi Arabia (6.6%) and Israel (5.2%), and just ahead of Russia (3.1%). The world average is 2.2%, so approaching that should be a target for us.

        However, just cutting spending won’t work, because too much of the economy is dependent on all of those defense dollars being pumped into it. I live in Georgia, and a few years ago under sequestration, there were concerns of a mini-recession here due to the heavy military presence in the state and the local economy’s dependence on it. So cuts in defense spending would have to be made up by corresponding increases in infrastructure spending.

      • Thomas Paine  On February 7, 2023 at 8:09 am

        Defense spending needs aren’t a function of GDP, but rather the nature of what needs defending. There’s no greater waste of public spending beyond what’s actually needed than in defense, where money spent on cruise missiles and such just sits around waiting to be blown up. Far better would be to inject that money into investments that offer multiplier returns and future payoffs, such as community health care clinics and education. This country needs butter, not guns.

        If anything, I would expect the world’s largest economy to have one of the *lowest* GDP ratios, as true defense is fundamentally a fixed cost, and independent of the nature of a country’s economy. That it’s become just another pork barrel, especially with the elimination of Congressional earmarks, is yet another argument the DoD budget needs drastically cut.

        The defense department also shouldn’t be a make-work project to prop up local and state economies that can’t attract actually productive activities. Cuts in defense spending don’t have to be made up in anything, and it’s high time to wean our country off of the MIC instead of shoveling ever-increasing dollars into its maw. For the cost of a single F-35, we could send over 500 students on full four-year, free-ride scholarships to Harvard. There’s no question which is the better investment.

        But, if GA should happen to suffer a slow-down when we finally start spending based on actual need, expanded federal social programs such as school lunch programs and educational training will have funding, and do a whole lot more for the people there.

      • Larry Benjamin  On February 7, 2023 at 9:26 am

        GDP is just a useful metric to compare countries without overly weighting them based on the size of their economy. This is why NATO requires a 2% of GDP expenditure rather than a flat amount. But I agree with you that any dividends from reducing military spending should be shifted to infrastructure. Unfortunately, given the benefits to individual districts and states and the reluctance to be viewed as anti-military, it’s not likely that we’ll see a majority in either house willing to significantly reduce spending.

  • Ed O  On February 6, 2023 at 3:53 pm

    In your next post on the threat of inflation, it would be good to point out that inflation, while it may cause blaring headlines and real hardship for people on fixed incomes that are not adjusted for inflation, is generally a good thing for ordinary people whose debt is larger than their dollar-denominated savings. (Most people have very little savings in US dollars. Even the wealthy often have more debt than US dollars in savings accounts, because most of their wealth is usually in stocks or other assets that generally retain their value even through inflationary periods, though it’s true that inflation generally leads the Fed to raise interest rates, which tends to lower stock prices until the rates go down.) Inflation reduces the value of our mortgages and other debt, while over time it also leads to higher income levels, which makes it easier to pay off those debts in the long term (just as inflation makes it easier for the government to handle the national debt). Anyone who got a mortgage 20 years ago knows that it’s a lot easier to make those payments now, after 20 years of gradual inflation.

  • Howard  On February 6, 2023 at 5:53 pm

    SUGGEST: whenever mentioning monetary amounts from prior decades would you please include adjusted for inflation and also what the GDP was that year… example: “$9,999,999 (inflation adjusted to $9,999,999 in 2023 dollars; GDP in 1824 was $9,999,999)”… or at least provide a table at start of article

  • Dale Moses  On February 6, 2023 at 6:19 pm

    Something to maybe consider looking into is a fundamental understanding of what debt is and what money is. A lot of people say “money is debt” and this is correct but they usually think it goes the other way.

    Let’s say I do a service for you. You pay me $100 for the service. The thing is. I didn’t really get anything from you. It’s not food I can eat or a material I can use to build. It’s a promise from society that, if I deliver that $100 I will receive $100 in goods or services back. I did a service for you and you gave me a debt society owed you. This is fine and good really. And also why the fed has an MZM (money, zero maturity…IE it includes dollars and things like corporate debt) measure of money. And it’s also why Bitcoin et al are all scams.

    So what does it mean for a government to owe money and is this different than a person? Well for a government it makes little sense that it can owe money at all. After all it is composed of the people inside its borders and they tend to own its debt. It would be like owing yourself money. Instead we can think of it like we think of debt from an individual point of view. You trade consumption later for consumption now. I get a loan and buy a house. My income is reduced for 30 years but I have a house right now and get to live in it.

    For a person paying off a debt is really important because your income stops at some point. A person stops working and then dies. If that debt still exists then you have to sell assets. But a nation does not stop working and die. A nation continues to work and increase its GDP. And so a debt allows this nation to effectively pay itself back later when it’s more rich. If you grow at 3% and inflation is 6% then a 4% of budget deficit at < 2% interest does not grow the national debt as a function of GDP. This is obviously sustainable

    Our our current deficit levels sustainable? Maybe not but i don’t think this is really a spending issue. As we saw with Clinton’s surpluses there was still plenty of private investment floating around to cause an excess of investment and a bubble. And a cursory examination of cash on hand for major corporations as well as the state of the venture capitalism would should clearly suggest that available investment is too high. Rich people and corporations have far money than they can spend or save.

    • Dale Moses  On February 6, 2023 at 6:21 pm

      *should read: if inflation is 3% not 6%

  • Larry D Benjamin  On February 6, 2023 at 9:05 pm

    Doug, thank you for an outstanding explanation of how we got here. One thing that many people don’t understand when they say “how will we ever pay off the national debt” is that it’s being paid off all the time, whenever anyone cashes in a savings bond, for example. As long as we have inflation, money we borrow now will be paid back in cheaper future dollars. So the only way the national debt will be a problem is if we enter a prolonged deflationary period.

  • senecadoane  On February 7, 2023 at 12:32 pm

    Sent from Yahoo Mail for iPhone

  • Michel S.  On February 8, 2023 at 11:50 am

    Thank you for this write-up Doug, insightful as usual.

    One note though: you compared the US with other major economies (in particular Japan and the EU) and noted in all cases debt default is just a matter of politics (I’m paraphrasing).

    This is all true, but paints a slightly misleading picture in that you omit smaller economies, that tend to have more borrowing (both governmental and corporate) in foreign currencies. The Asian financial crisis in 1998, for example, or Argentina’s multiple crises, are often a combination of a sudden devaluation (because of an unsustainable currency peg) leading to debt servicing issues because, in this case, simply “printing more money” would just result in further devaluation, in addition to higher inflation.

    • weeklysift  On February 9, 2023 at 6:31 am

      I did mention Greece, which is sort of an example. I agree that if you owe something you don’t control, like gold or some other country’s currency, you’re in a completely different situation than if you owe something you do control.


  • By Gains and complaints | The Weekly Sift on February 6, 2023 at 12:30 pm

    […] week’s featured post is “How did we get $32 trillion in debt?“. It’s a somewhat nerdy look at the history of the national debt, preparing the way for […]

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