With the August 2nd deadline for raising the United States public debt ceiling looming, it might be useful to take a longer-term view on exactly how bad the US debt situation is at least with respect to the past.
Figure 1
Figure 2
Figure 3
The results are interesting (or at least I think they are). At 92.5 percent of GDP, the US public debt is currently at its second highest point in history exceeded only by the Second World War period when the debt to GDP ratio hit 121 percent. However, the Second World War is a rather unique period and if one removes it from the picture, the current the debt to GDP ratio is the highest it has ever been. Aside from the Second World War and the immediate post-war era, the US debt to GDP ratio was rarely above 40 percent. When real per capita debt is examined, the US public debt is now the highest it has ever been at about 20,000 dollars per capita in 1982-84 dollars. The current incline is part of increases that began in the mid-1980s reversing nearly 40 years of declining real per capita public debt after the Second World War. The third graph shows the annual growth rate of real per capita US public debt and it suggests that some growth rates were much higher in the 19th century as opposed to the 20th century though the outliers obscure patterns due to their effect on the graph scale. There are some really large outlier years associated with the 1837 financial crisis period that’s sees growth in the real per capita public debt at over 800 percent. However, there is a small numbers problem here. Real per capita debt in 1836 is 24 cents per capita while in 1837 it is $2.26 per capita – thereby generating a massive increase of over 800 percent. Yet despite the "massive increase", this amount of debt was still low relative to GDP when compared to the present. To get around the outliers and the effect on the scale and get a better perspective on long term growth trends, I LOWESS smoothed the annual growth rates of real per capita public debt and construct the fourth figure.
Figure 4
This also shows the 19th century as a period of much higher rates of annual real per capita debt growth with a decline in growth rates as we move into the twentieth century. Indeed, the average annual growth rate of real per capita public debt was 21 percent from 1790 to 1899 and about 5 percent from 1900 to 2010. Higher per capita debt growth is not unexpected in the 19th century given the United States was a young country with a vast frontier and lots of infrastructure to build.
Of course, I would not interpret this to suggest the current US debt problem is not serious and that one can get away with simply raising the debt limit and doing nothing to resolve the imbalance between revenues and expenditures. As a share of GDP and in terms of real per capita amounts, the debt problem is large and it is growing. Moreover, incurring large amounts of debt to build your economy when it is growing and developing rapidly is a different situation from one where your economy is stagnating. However, growth rates of real per capita debt and even the debt to GDP ratio have been higher in the past suggesting that the current situation can be fixed.
I remain confused as to why raising taxes to the brutal levels of the Clinton administration is seen as an impractical solution to the medium term fiscal issues. In the long run we'll have to deal with health care costs, but that seems to be a concern across the first world, in general, and not specific to the United States.
Posted by: Joseph | July 06, 2011 at 02:54 PM
Joseph:
Christina Romer had an article in the NY Times dealing with the need to increase taxes to fight the US deficit on July 2, See:
http://www.nytimes.com/2011/07/03/business/economy/03view.html
Posted by: Livio Di Matteo | July 06, 2011 at 03:10 PM
Livio, I'm not sure the "young growing country" is a good argument to justify high levels of real debt growth in the 19th century. You could argue that the US was rapidly expanding its infrastructure in the postwar era; think about the interstate highway system, the nuclear arsenal, the space program, the incredible expansion of the US military internationaly, etc.
I think it'd be interesting to discuss the new Carmen Reinhart work on financial repression, namely that interest rates were "repressed" at levels which would penalize creditors in order to stabilize or slowly decrease the level of real debt. Perhaps it is preferable to some other options on the table at the moment.
It sounds to me like a partial euthanasia of the rentier and might even have some desirable distributional effects. Perhaps it would also shift corporate financial structure from debt to equity and perhaps even curb speculation by reducing the attractiveness of levered bets. I'm sure somebody else could elaborate more on this.
Posted by: Guillaume | July 06, 2011 at 05:10 PM
Guillaume's suggestion to discuss financial repression is spot on. This option might quite a bit more palatable than either default or high inflation. Partial Euthanasia of the rentier, to quote Guillaume, could be a boon (or at least that's what the socialist in me thinks). Of course, the rentier class is very powerful, especially in the U.S. One wonders if they could be put at any economic disadvantage?
On a more technical note, I question whether these debt measures are the most appropriate measures for the time span considered. We all agree that the nominal debt levels from the 19th century are not comparable to 20th century levels. But I wonder if the normalized debt/GDP levels are comparable either? Looking at Livio's first chart, the US hit a debt/GDP of 30% in the 1860's, which appears to be inordinately high for that period, and probably generated significant consternation to the politicians of that era. Today, however, almost every OECD nation carries at least 30% debt/GDP. Obviously, the 30% debt/GDP level was far more significant in the 1860s than it is today (on the other hand, the UK did have a debt/GDP of 200% at the start of the 19th century right after the Napoleonic wars, so maybe I am wrong).
One might think that the more primitive economies of the 19th century had less revenues available upon which to borrow against; not just in nominal terms, but also when compared to the size of the economy. In other words, were not the gov'ts of the 19th century much smaller than they are now? So, in addition to scaling debt by the size of the economy, shouldn't debt levels also be scaled by each economy's ability to raise taxes, or some other measure of income? Perhaps the debt levels should be scaled by the size of the federal gov't, measured by the total taxes collected (although this measure would be volatile during recessions)?
Posted by: Kosta | July 06, 2011 at 06:04 PM
You are again using gross debt, not debt held by the public. If you are going to count debt that the government owes to itself, then you need to also count the assets (e.g. the debt) that the government has. That is why we care about net government debt, not gross government debt.
Posted by: RSJ | July 06, 2011 at 08:12 PM
"Moreover, incurring large amounts of debt to build your economy when it is growing and developing rapidly is a different situation from one where your economy is stagnating."
Indeed. When the economy is growing and developing rapidly is the time to increase taxes and run surpluses, hence reducing the debt. Times like now require deficits.
Posted by: Min | July 06, 2011 at 08:48 PM
What's this nonsense about infrastructure in the 19th Century? The US Government didn't spend much on internal improvements directly. In fact until the 1860's the US Government was pitifully small; it paid for the Army and Navy, the federal Courts, the arming and training of the Militia/National Guard and the Post Office.
There was no Income Tax until 1863, the US Government subsisted on customs duties.
Most of the 19th Century's great infrastructure projects, the railroads and canals were built by private interests and financed by land grants. Now you can argue that that land was seized from its Native owners, but railroads generally weren't paid for with tax revenue.
The only exception was the first Transcontinental Railroad, the Union Pacific and the Central Pacific, which received $16,000 per mile paid for by US government bonds. The bonds had to be paid back and were and the entire route is still in use and operated by it's original owner, the Union Pacific Railroad. But all the other transcontinental routes, 7 in all, were not given tax support, only land grants.
Not that railroading was entirely risk-free, 80% of all route-mileage in the United States has been bankrupt at some time or another. See Ben Graham's "Intelligent Investor". Graham worked on Wall Street when railroad bonds were the dominant form of corporate paper. He book shows new both knew and loved the business of trading railroad securities throughout.
Posted by: Determinant | July 06, 2011 at 09:54 PM
RSJ, I would love to get an estimate of public assets so that I could calculate net debt all the way back to 1790. Have not come across it yet. Determinant, my U.S. Economic history is a little rusty but from what I remember there was a fair amount of public support/subsidies for railway companies. Along with land grants, there were also loan guarantees, purchases of corporate bonds and tariff refunds on iron imports for rails. As well, government bonds to finance construction at low interest rates are still a form of subsidy. As well, most of the canals built in the first half of the 19th century were heavily subsidized by government though I think there the state and local role was also important.
Posted by: Livio Di Matteo | July 06, 2011 at 11:04 PM
There were loan guarantees and subsidy payments by the US Government for the Union Pacific/Central Pacific only.
There was an enormous subsidy in the form of land grants given to many railways, especially the western ones, but that was an off-balance sheet transaction entirely. Such a transaction did not involve the issue of US government debt, which was why the land grants were done in the first place. Land grants wouldn't show up in your debt measurement.
The railways east of Chicago generally never got any land grants, those that were granted were marginal at best.
The Union Pacific/Central Pacific received direct subsidies but they were the first Transcontinental route and were seen as strategic. All the other routes just got land grants. The Canadian Pacific got a direct subsidy after the Riel Rebellion, but the Grand Trunk in Ontario didn't. The Intercolonial Railway from Montreal to the Maritimes was constructed and owned by the Government as it was a promise in the BNA Act but also a defence work. The British increased the garrison in Canada during the US Civil War and it became painfully apparent that an all-rail route from Toronto to Halifax on Canadian soil was desperately needed.
Posted by: Determinant | July 06, 2011 at 11:45 PM
Joseph above does not get the distinction between macroeconomics and microeconomics: a deficit for a government is TOTALLY AND COMPLETELY different from a deficit in the case of a microeconomic entity like a household or business. The solutions in each case are totally different. That is, a government deficit is NOT, REPEAT NOT cured by raising taxes or cutting spending.
If Joseph has not studied economics, he cannot be blamed for that mistake. More serious though, is the NY Times article Christina Romer: I get the impression that Romer does not get the above distinction. But then as Dean Baker said, “In elite Washington circles, ignorance is a credential.”
Posted by: Ralph Musgrave | July 07, 2011 at 06:48 AM
Livio,
I'm with you that the current US debt problem can be solved. Certainly the US has more fiscal capacity to raise taxes than, say, the European countries, although query whether there is the political will to do so.
But the bigger problem facing all western countries are the off-balance sheet liabilities that aren't reflected in public debt figures, namely future obligations to pay for entitlement programs (medicare, social security, etc. - we're seeing this already at the US state level and their inability to finance public employee pension obligations). Needless to say, those obligations have increased exponentially in the post-WWII era. And while it may be fair to say that the US is in a better position on this front than some other western countries (by virtue of having a younger and growing population, higher retirement age, less generous benefits, albeit offset by more expensive health care costs), that's less a comment on the health of US public finances than on the disastrous state of public finances in Europe and elsewhere. I don't see any political will to address those problems (either in the US or in Europe).
Guillaume, I'm curious how we could "repress" the interest rate on public debt much more than we already have. The nominal interest rate on public debt is as close to zero as you can get and the real return on government debt these days (unless you're willing to take a flyer on Greece or Portugal) is negative. Indeed, we've seen the "rentier" class taking it in the teeth over the last 3 year as result of lower interest rates. Why do you think pension plans have been running hefty deficits and/or slashing benefits? They can't get as sufficient return on "safe" investments to fund their future obligations.
Posted by: Bob Smith | July 07, 2011 at 08:58 AM
Ralph: *If* there is a shortage of AD, and *if*, for some reason, monetary policy either cannot or will not fix that shortage, then that is *generally* recognised by economists as a case where the government should not *immediately* try to fix a debt problem. (Because raising taxes and/or cutting spending might worsen the AD problem, which is the crux of the macro/micro distinction in this case.) But otherwise, government debt can be a problem, in macro as in micro. The debate is not about whether, but *when* the US needs to do something.
Posted by: Nick Rowe | July 07, 2011 at 09:45 AM
IIRC, the UK had debt/GDP ratios over 200% several times in history: after WW1 and WW2, and also in the Napoleonic wars. What amazes me is that it could handle that debt load from the Napoleonic wars, when government was a smaller share of the economy, so the tax system was not as ready.
Posted by: Nick Rowe | July 07, 2011 at 09:49 AM
Bob re fiscal repression: you're right in noting that present policy is in effect fiscal repression, with savers receiving a negative real return. Maintaining this policy might be one way reduce debt levels, and this would effectively redistribute wealth from savers to borrowers.
As long as the economy remains depressed, implementing this policy would be straightforward. But once the economy recovers, it is unclear to me how interest rates would be repressed without sparking high inflation. At least, I don't understand how it could be done for gov't debt, or any other debt, that is sold on the market.
You raise a good point about pension funds being in the "rentier" class. Reinhart argues that financial repression was one of the methods that the U.S. used to reduce their WWII debt is the subsequent years. Pension funds (and retirement savings) were not nearly as prominent in those years, which perhaps made the financial repression strategy viable.
Posted by: Kosta | July 07, 2011 at 12:54 PM
While Britain managed a debt load of 200% of GDP, they had some important sources of room for maneuver. First, British financial regulations had been deeply oppressive since the Bubble Act (which banned the formation of joint-stock companies - essentially partnerships - without parliamentary approval). Second, geopolitically, they had just dealt a blow to the only country capable of posing an existential military threat to Britain. Cuts to the navy (which comprised the single largest item of spending), and of course, drawing down British land forces were a no-brainer. Moreover, as a state that enfranchised only a narrow swathe of the populace (including within it, many of those lending money to the government), cuts could be made with impunity.
The United States does not have either option available to it. The US is probably in need of greater prudential regulation of finance, not less. Any spending cuts are going to involve reductions to politically popular entitlement spending. Withdrawal from Afghanistan and elsewhere will help, but will still leave behind a large deficit. Moreover, the rise of China is likely to increase, not decrease, the pressure to spend more on defence as time goes on.
Posted by: hosertohoosier | July 07, 2011 at 02:35 PM
Kosta: "Maintaining this policy might be one way reduce debt levels, and this would effectively redistribute wealth from savers to borrowers."
Possibly, but that can cut both ways. Low interest rates might slow down the growth of debt (say, Canada, circa 1993), but equally they make it less costly to borrow, encouraging governments (and individuals) to borrow more (i.e. Greece, since joining the Euro). A priori it isn't clear which effect will dominate.
Posted by: Bob Smith | July 07, 2011 at 05:28 PM
Bob: "Low interest rates might slow down the growth of debt ..., but equally they make it less costly to borrow, encouraging governments (and individuals) to borrow more."
I agree. If the financial repression is mediated solely through the rates set by the central bank, one could quite easily see an explosion of debt. Similarly, in a growing economy, inflation would quickly get out of control.
But, the implementation of financial repression would also probably include regulatory changes such as interest rate caps on savings and deposits, as well as on loans to the gov't, capital controls to prevent capital fleeing to more relaxed regimes and increased regulation of the financial institutions (from page 6 of Reinhart's paper on financial repression http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf).
Controlling domestic credit growth could be done by placing a floor on the rates of news domestic loans and increasing the spread whenever growth became too heady. Simply restricting loan availability might work as well.
As for gov't debt, Bob, this is an extreme measure. If the gov't does not take advantage of this opportunity to reduce debt, the next steps are either hyperinflation or default. Not to say all gov'ts will be responsible, but if a gov't is seriously looking at financial repression, none of its options are appealing.
Posted by: Kosta | July 07, 2011 at 06:06 PM
Just to specify what financial repression would look like in this zero interest rate world: lifting the inflation target and keeping rates at zero. At least that's the simplest way I can put it.
Posted by: Guillaume | July 11, 2011 at 11:28 AM