The Debt to GDP Ratio is Not About to Reach a Post War High

[Hannah Bell]

The NYT attributed an inaccurate assertion to the Treasury that: "debt as a percentage of G.D.P. is rising and nearing a postwar high."

Even counting the debt held by trust funds, the debt to GDP ratio is only around 70 percent of GDP. It was near 120 percent of GDP ($18 trillion in the current economy) immediately after World War II.

--Dean Baker

http://prospect.org/csnc/blogs/beat_the_press_archive?month=08&year=2009&base_name=the_debt_to_gdp_ratio_is_not_a

[TexasObserver]

1. Critics of massive federal spending never acknowledge that post WWII fact.

We spent our way into prosperity during and after WWII.

As you note, our spending was 120% of GDP there for a few years.

The best way to crater the recovery that has just begun would be to cut spending. The way to get the defict down is to make the economy healthy, get people back to work and fully employed, and paying taxes. It was the rise in revenues from full employment which enabled President Clinton to finally get a balanced budget.

[Hannah Bell]

2. The real issue isn't deficit spending, but what the money's spent for.

To rebuild & retool the US plant v. give-aways to banksters & other forms of welfare without material investment.

[HamdenRice]

3. There is a very, very important difference between the WWII debt and today's debt

I was reading this very interesting new economic history theory about the role of the debt, deficit spending and the war that takes a different view from most of the conventional Keynesian explanations for the success of the New Deal and WW II spending.

The debt run up by the Roosevelt administration was owed primarily to US citizens in the form of war bonds. After the war, these bonds provided an added boost of income to working class and middle class Americans, which helped fuel the consumer driven expansion after the war.

Today's debt is owed primarily to Asian central banks. The income on that debt will not contribute to the consumption component of domestic US GDP -- unless China can be persuaded to reverse its mercantilist trade policies and buy American.

Also with a domestically held debt, there is little risk of a currency collapse and inflation driven by loss of confidence by foreign investors -- something that did indeed happen to most European countries after the war, countries whose debt was held primarily by US investors.

So I don't think they are comparable, and I think current levels of debt are smaller but more structurally dangerous.

[ThomWV]

4. Where were you reading that?

I'd very much like to see the math behind it.

[HamdenRice]

5. I stupidly didn't bookmark it. I'll look for it and try to get a link.

Iirc, the problem he was looking at was why, after the war, there wasn't a typical post war recession. The reason was that regular Americans had all this wealth and income from war bonds that kept aggregate demand high for consumer goods, even as war production decreased drastically.

If you consider how high corporate taxes and income taxes on wealthy individuals were, then in paying down the war bonds, the govt was basically taking tax revenue from the corps and rich, and distributing it to the middle class as interest and principal on the bonds.

Now bonds are mostly held by overseas investors, banks and the wealthy.

[Hannah Bell]

8. us debt = something like 11 trillion (not up to date with the obama measures)

something over 2 trillion of it is social security trust fund debt.

i don't believe it's accurate that the bulk of the us debt is owed to "asian central banks", but i may be wrong, so let's have a link.

here's one:

http://www.treasurydirect.gov/NP/BPDLogin?application=np

per this, us debt = 11.7 trillion, 4.3 trillion of which is "intragovernmental", i.e. owed by one gov't account to another, e.g. us general fund to social security trust fund & thus ultimately to us public.

7.3 trillion = "public debt". this is the portion which might be held by "asian central banks". your link, should you choose to provide it, will clarify the extent to which it is.

[Statistical]

6. The difference was the debt spending from WWII was from a single event...

namely WWII and when it ended govt spending was reduced nearly 90% allowing the govt to pay down 4% of the debt on average per year.

Our current debt problem is not from a single event but more like a credit card junkie who earns $30K per year but charges $35K a year and does that for a couple decades. There is nothing to indicate we will be "able" (political will) to substantially reduce govt spending or substantially raise taxes (without also spending all the "new" money). Even under the most optimistic estimates (by the GOA) the debt grows about $9B (almost 80%) by 2019. This isn't from any new initiative but rather just business as usual. Even assuming GDP grows by 3% per year by 2019 the national debt will exceed 100% of GDP.

By optimistic I mean:
* US exits recession in Q3-2009
* US job growth returns in Q2-2010
* bush tax cuts expire
* war in Iraq ends in 18 months
* war in Afghanistan peaks in 2010 and then shows resource reductions over next 3 years.

Even worse is it is likely our carrying costs (interest) for the debt will rise. Currently we spend about 3.5% to service the national debt. Lets say due to increased risk and robust global economy in 2019 our carrying costs rise to just 5%. 5% of $20T is $1T. Of course that just pushes the debt down the line without repaying any of it.

1 friggin trillion dollars and that is just interest only, not single penny to pay down the debt. To put that into perspective the 2009 federal revenue is $2.7 trillion. Even adjusted 3% per year the budget will be somewhere in the $3.6T range. Interest on the debt would consume 28% of the budget.

[cap]

7. except that we won WWII and there was no one else left standing

our allies were decimated. They were completely flattened from the bombings and devastation of the war. Our adversaries were toast.