What do Japan, Greece, Iceland, Italy, Portugal, Ireland and Belgium have in common? They all have national debt to gross domestic production ratios worse than the United States. According to the Organization for Economic Cooperation and Development, the U.S. government debt to GDP percentage in 2011 (the most recent year for actual numbers) was actually below average for the 35 OECD member countries (102.2 percent vs 102.9 percent).
Japan tops the list at a whopping 205 percent. At the other end of the spectrum are countries such as Australia, Norway and South Korea (27-37 percent of GDP). Yes, we have a lot of debt, but it is not abnormal among developed countries.
With sequestration on the minds of most Americans, it is time to talk factually about deficit spending and the U.S. debt situation.
I have been an economist who for decades has said deficit spending and government debt are overstated issues.
In business, year-to-year growth in debt is not necessarily bad. Businesses use debt to fuel growth. As long as year-to-year net income growth exceeds interest obligations, it is called leverage.
Government debt has often been a red herring for people arguing other philosophical viewpoints on tax policies or social policies. Truthfully, you can sustain some level of deficit spending. Philosophically it may not be what you desire, but financially and economically you can sustain it.
Recent deficit spending does raise my concerns regarding the rate of deficit spending. According to White House statistics, in 1951-1989, the U.S. debt to GDP ratio averaged 48 percent. In 1990-2008 it stepped up to 63 percent, and it ended 2011 at 98.7 percent.
In the earlier time period, our deficit spending ran about 1.9 percent of GDP each year, while real GDP growth was outstripping it at 3.5 percent. In the 1990-2008 period, deficit spending stood at 2.9 percent of GDP, while GDP growth nearly matched it at 2.75 percent per year. In 2009-11, deficit spending reached 9.3 percent of GDP while GDP growth slowed to 0.4 percent.
We deficit-spent merrily from 1951 through 1990 and still drew our government debt down from 80 percent of GDP in 1951 to 56 percent in 1990, because our economic growth allowed us to incur the spending. Some may argue the spending actually enhanced the growth through infrastructure and elevating the quality of human capital. From 1990 to 2008 we clearly pushed the limits by matching deficit rate to GDP growth rates, and debt as a percent of GDP crept up to 70 percent by 2008.
The worm turned in 2009-11. Clearly the level of deficit spending and the level of economic slowdown were not compatible, and we expanded our debt obligation to relatively high levels (but not out of the norm). Preliminary numbers show 2012 to be a repeat of the 2008-11 experience.
We have reason to be worried about our current rate of deficit spending. We need to respond by managing our financial house (income as well as expenditures, i.e., taxes as well as spending). We should, however, resist the urge to summarily say deficit spending in and of itself is the culprit. One could argue that we never would have seen the growth of 1951-89 without the public investment made.