Is the Government Debt Really Out of Control?

The GOP primary has become an orgy of fear mongering, and not just about immigrants and terrorists. The candidates regularly portray the federal debt, too, as a dire threat to America’s future. But is the debt really out of control? How can we tell?

As an economist, my instinct is to look at the numbers. Three numbers are especially important: The debt ratio, that is, the size of the current debt relative to GDP; the rate at which the economy is growing, measured by the annual rate of increase of current-dollar potential GDP; and the rate of interest the government pays on its debt.

Multiply the first number by the difference between the second and the third, and you get a magic number that gives the level of the deficit, adjusted for the effects of interest rates and the business cycle, that is needed to stabilize the debt. (That way of measuring the deficit is technically called the primary structural deficit, but we can just call it the adjusted deficit, for short.)

Right now, the debt ratio is 74%, the average interest rate on the debt is 1.7 percent, and the economy is growing by 4 percent a year in current dollar terms. Put those into the formula, and you get 0.74(0.017–0.04) = -0.017, a deficit of 1.7 percent. That means an adjusted deficit of exactly 1.7 percent will hold the debt ratio steady over time. If the adjusted deficit is greater than 1.7 percent, the debt ratio will tend to grow from year to year. If the adjusted deficit is less, or if there is a surplus, the debt ratio will fall.

As of 2015, the adjusted deficit of the federal budget is only 0.6 percent of GDP, quite a bit smaller than the magic number of 1.7 percent. Right now, then, the debt is well under control. In fact, over the next few years, we can expect it to shrink.

If that is true, then what are those GOP candidates ranting about? Can we sleep safely without worrying about federal finances, now or in the future? The answer is both “Yes,” and “No.”

Yes, we can sleep safely, in the sense that the debt numbers right now are pretty healthy. Despite the heated rhetoric of the GOP candidates, the debt is not galloping out of control.

But if we look ahead, we might find something to keep us awake in the night after all. The current happy circumstances that keep the debt under control are likely to change over time. What we should be worrying about is whether Congress and the new President we will elect next year are capable of making the adjustments that those changes will call for.

Will we elect a government that can enact meaningful tax reform? One that will adjust our entitlement programs to accommodate the realities of an aging population? Or will we elect a government of ideologues who hide behind slogans like “No new taxes!” “No more debt!” to win elections and then continue business as usual?

To learn more about debt math, check out this slideshow or read this longer post on Ed Dolan’s Econ Blog.

Written by

Economist, Senior Fellow at Niskanen Center, Yale Ph.D. Interests include environment, health care policy, social safety net, economic freedom.

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