Federal deficits and the national debt have been heavily emphasized lately. Is the emphasis justified?

Debt

Twenty years ago, our national debt was about $8 trillion with GDP about $12.5 trillion so Federal Debt / GDP was ~65%

Today, our national debt is $36 trillion with GDP of $30 trillion so Federal Debt / GDP is now ~120%.

This represents a substantial deterioration in our country’s financial health.

In other words, our debt has increased 4.5x while our economy has only grown 2.5x over the last two decades.

Debt to GDP of 120%+ is a level we’ve only seen during the COVID era (shut economy down simultaneously with multi-trillion debt-financed stimulus) and in the 1940s due to spending to fight World War II.

Chart below shows Debt / GDP from 1929 through 2024. Remember this is only federal debt so it excludes state and local debt, household debt, corporate debt, etc…

One major difference between now and the 1940s is that private debt was extremely low by that point after the private sector deleveraging that took place during the Great Depression and the War.

In other words, after the war, the economy had significant appetite and capacity to borrow in order to make productive private investments plus the U.S. was a manufacturing powerhouse, fiscal imbalances were quickly corrected after the War, and we were consistently running trade surpluses meaning we were consistently producing more than we consumed.

That combination of factors helped produce a very robust two decades after the War ended as is evident by ~5% average annual GDP growth from the 1940s through the 1960s (The Golden Era) compared to around a 2% average growth we’ve experienced since 2000.

Deficits

Currently, federal tax revenues are about $5 trillion while federal spending is about $7 trillion. Therefore, the federal deficit is currently $2 trillion per year, or almost 7% of GDP.

The chart below shows Deficit / GDP going back to 1929 through 2023 (i.e. not including 2024).

The current deficit of 7% to GDP was only exceeded by the COVID era, Great Financial Crisis and World War II. In other words, the current deficit has historically been characteristic of severe crises, but we’re not currently in a crisis.

So, yes, I think this is an important issue and the emphasis is probably justified.

It is vital to our national security and our nation’s long-term prosperity that we get back on a sustainable fiscal path. I’d like to see politicians proactively take on this difficult task instead of continuing to “kick the can down the road” as they tend to do.

Of course, this task is easier said than done given (1) the nature of the largest budget items, which are either mandated by law and not likely to change, or important to our national defense, and (2) the fact that there are many people with a vested interest in maintaining the status quo.

A Worthy, Achievable Goal

A balanced budget would be ideal, particularly during times of relative peace and economic growth. The last great example of this was in the latter-half of the 1990s. The 1990s were relatively peaceful and prosperous, the budget was finally getting balanced and federal debt to GDP declined from 64% (1995) to 55% (2000) due to a combination of decreasing deficits and continued economic growth.

But, at this point, even reducing the deficit to a percentage of GDP that is less than the long-term rate of growth would be a productive step. In other words, if the deficit could be reduced from 7% of GDP to 2% of GDP, for example, that would put our nation back on a more sustainable path. That would imply a deficit of $600 billion down from $2 trillion.

 

Some resources on federal budget and debt I found helpful:

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