What is U.S. Debt? – P2: Comparing Debt to GDP
When the United States needs more money than
it has, the U. S. Treasury will raise that money by issuing securities which are basically
a promise that if you give us money now we’ll pay you back plus some interest in the future.
In other words, debt. Most of our debt is owned domestically but some of it is owned
by foreigners and even other countries. This is called our public debt which is currently
around $10 trillion and growing. Now there’s another $5 trillion of debt that the U.S.
owes itself. You see when the U. S. collects revenue for
specific programs like Social Security that it will need for later, it doesn’t save or
invest that money, instead if gives that money towards other budget items and we just promise
to pay that money back in the future for the rightful program. If you add up the public
and intra-governmental debt you get what’s called the Gross Public Debt. Now the trillion
dollar question is how much debt is too much? And interestingly the best way to answer that
question isn’t just to add up all the debt and say dang, that’s a big number, but instead
to compare it to our Gross Domestic Product. So what’s that? Well you get the Gross Domestic
Product of a country by adding up all the goods and services produced in that country
each year. Now when GDP grows it means our economy is growing and we’re creating more
jobs and more tax revenue. So economists like to look at debt by comparing it to GDP and
that gives you a percentage. Now you can look at the percentage of debt to GDP over the
course of U. S. history and you’ll find that since 2001 our debt to GDP ratio has been
rapidly growing and shows little signs of stopping. So the real question is how much
debt to GDP is too much? Recently a team of economists performed a
comprehensive study looking at this very question. The study found that with anything below 90%
debt to GDP there was no observable effect on the country’s economic growth. But when
a country gets above 90% suddenly the economy begins to suffer.
Currently the U.S. is somewhere above 100% debt to GDP and these same economists have
concluded that our current debt trajectories are a risk to our long term growth and stability
as a country. So almost everyone agrees that we have to solve this debt problem but the
question is when do we solve it and how.