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The National Debt in Perspective

John Steele Gordon is a renown and surprisingly entertaining economic historian.  As we write this blog post, his Empire of Wealth , The Epic History of American Economic Power sits prominently on the bookshelf behind us.   Mr. Gordon regularly writes for both Barron’s and the Wall Street Journal, and we found his essay in today’s Journal, “A Short History of the National Debt,” to be well worth the read.

 When President Barack Obama signed the American Recovery and Reinvestment Act of 2009 into law yesterday, he was adding to what is already almost guaranteed to be the largest deficit in American history. In January, the Congressional Budget Office projected that the deficit this year would be $1.2 trillion before the stimulus package. That’s more than twice the deficit in fiscal 2008, more than the entire GDP of all but a handful of countries, and more, in nominal dollars, than the entire United States national debt in 1982. But while the sum is huge, it is not in and of itself threatening to the solvency of the Republic. At 8.3% of GDP, this year’s deficit is by far the largest since World War II. But the total debt is, as of now, still under 75% of GDP. It was almost 130% following World War II. (Japan’s national debt right now is not far from 180% of that nation’s GDP.)

That Japan statistic is startling.  Japan’s debts were largely accumulated during its “Lost Decade” of the 1990s, after that country suffered a stock, real estate, and credit crisis not too unlike the one we are experiencing today.  Our debt would have to more than double as a percentage of GDP to reach Japan’s levels, but we are still in the early innings of what promises to be a very long game.  The HS Dent Spending Wave forecasts that our economy will stay relatively weak until the early 2020s.  That’s plenty of time to “catch up” to Japan, unfortunately. 

In his editorial, John Steele Gordon mentions that balancing the budget and paying down debts were priorities that were second only to national defense during the early days of the Republic.  Completely eliminating the debt was the official policy of President Andrew Jackson, and in order to do this he was willing to veto “infrastructure” bills, no matter how tempting they might be.

Unfortunately, at this stage Jackson’s level fiscal conservatism is politically impossible, and even if it were possible it would make an already bad situation worse.  For an economy addicted to debt, the pains of withdrawal can be unbearable.

Interestingly, while the government is spending fast and loose, individual Americans are looking more and more “Jacksonian.”  Looking at the attached chart, we see that the US savings rate jumped in 2008.  Demographic trends suggest that the savings rate should continue to trend upwards for many years to come as the largest generation in history, the Baby Boomers, begin to save in earnest for retirement.

Retailers who have enjoyed the benefits of free-spending consumer over the past two decades should worry.