How people discuss the US national debt is an interesting case study of misleading usage of the wrong statistic. The key thing is that people discuss the raw debt amount and the rate at which that is increasing, but you ultimately care about the relationship between debt and US gdp (or US tax revenue).
People often talk about needing to balance the budget, but actually this isn’t what you need to ensure[1], to manage debt it suffices to just ensure that debt grows slower than US GDP. (And in fact, the US has ensured this for the past 4 years as debt/GDP has decreased since 2020.)
To be clear, it would probably be good to have a national debt to GDP ratio which is less than 50% rather than around 120%.
There are some complexities with inflation because the US could inflate its way out of dollar dominated debt and this probably isn’t a good way to do things. But, with an independent central bank this isn’t much of a concern.
the debt/gdp ratio drop since 2020 I think was substantially driven by inflation being higher then expected rather than a function of economic growth—debt is in nominal dollars, so 2% real gdp growth + e.g. 8% inflation means that nominal gdp goes up by 10%, but we’re now in a worse situation wrt future debt because interest rates are higher.
it’s not about inflation expectations (which I think pretty well anchored), it’s about interest rates, which have risen substantially over this period and which has increased (and is expected to continue to increase) the cost of the US maintaining its debt (first two figures are from sites I’m not familiar with but the numbers seem right to me):
fwiw, I do broadly agree with your overall point that the dollar value of the debt is a bad statistic to use, but: - the 2020-2024 period was also a misleading example to point to because it was one where there the US position wrt its debt worsened by a lot even if it’s not apparent from the headline number - I was going to say that the most concerning part of the debt is that that deficits are projected to keep going up, but actually they’re projected to remain elevated but not keep rising? I have become marginally less concerned about the US debt over the course of writing this comment.
I am now wondering about the dynamics that happen if interest rates go way up a while before we see really high economic growth from AI, seems like it might lead to some weird dynamics here, but I’m not sure I think that’s likely and this is probably enough words for now.
This made me wonder whether the logic of “you don’t care about your absolute debt, but about its ratio to your income” also applies to individual humans. On one hand, it seems like obviously yes; people typically take a mortgage proportional to their income. On the other hand, it also seems to make sense to worry about the absolute debt, for example in case you would lose your current job and couldn’t get a new one that pays as much.
So I guess the idea is how much you can rely on your income remaining high, and how much it is potentially a fluke. If you expect it is a fluke, perhaps you should compare your debt to whatever is typical for your reference group, whatever that might be.
Does something like that also make sense for countries? Like, if your income depends on selling oil, you should consider the possibilities of running out of oil, or the prices of oil going down, etc., simply imagine the same country but without the income from selling oil (or maybe just having half the income), and look at your debt from that perspective. Would something similar make sense for USA?
At personal level, “debt” usually stands for something that will be paid back eventually. Not claiming whether US should strive to pay out most debt, but that may help explain the people’s intuitions.
How people discuss the US national debt is an interesting case study of misleading usage of the wrong statistic. The key thing is that people discuss the raw debt amount and the rate at which that is increasing, but you ultimately care about the relationship between debt and US gdp (or US tax revenue).
People often talk about needing to balance the budget, but actually this isn’t what you need to ensure[1], to manage debt it suffices to just ensure that debt grows slower than US GDP. (And in fact, the US has ensured this for the past 4 years as debt/GDP has decreased since 2020.)
To be clear, it would probably be good to have a national debt to GDP ratio which is less than 50% rather than around 120%.
There are some complexities with inflation because the US could inflate its way out of dollar dominated debt and this probably isn’t a good way to do things. But, with an independent central bank this isn’t much of a concern.
the debt/gdp ratio drop since 2020 I think was substantially driven by inflation being higher then expected rather than a function of economic growth—debt is in nominal dollars, so 2% real gdp growth + e.g. 8% inflation means that nominal gdp goes up by 10%, but we’re now in a worse situation wrt future debt because interest rates are higher.
IMO, it’s a bit unclear how this effects future expectations of inflation, but yeah, I agree.
it’s not about inflation expectations (which I think pretty well anchored), it’s about interest rates, which have risen substantially over this period and which has increased (and is expected to continue to increase) the cost of the US maintaining its debt (first two figures are from sites I’m not familiar with but the numbers seem right to me):
fwiw, I do broadly agree with your overall point that the dollar value of the debt is a bad statistic to use, but:
- the 2020-2024 period was also a misleading example to point to because it was one where there the US position wrt its debt worsened by a lot even if it’s not apparent from the headline number
- I was going to say that the most concerning part of the debt is that that deficits are projected to keep going up, but actually they’re projected to remain elevated but not keep rising? I have become marginally less concerned about the US debt over the course of writing this comment.
I am now wondering about the dynamics that happen if interest rates go way up a while before we see really high economic growth from AI, seems like it might lead to some weird dynamics here, but I’m not sure I think that’s likely and this is probably enough words for now.
This made me wonder whether the logic of “you don’t care about your absolute debt, but about its ratio to your income” also applies to individual humans. On one hand, it seems like obviously yes; people typically take a mortgage proportional to their income. On the other hand, it also seems to make sense to worry about the absolute debt, for example in case you would lose your current job and couldn’t get a new one that pays as much.
So I guess the idea is how much you can rely on your income remaining high, and how much it is potentially a fluke. If you expect it is a fluke, perhaps you should compare your debt to whatever is typical for your reference group, whatever that might be.
Does something like that also make sense for countries? Like, if your income depends on selling oil, you should consider the possibilities of running out of oil, or the prices of oil going down, etc., simply imagine the same country but without the income from selling oil (or maybe just having half the income), and look at your debt from that perspective. Would something similar make sense for USA?
At personal level, “debt” usually stands for something that will be paid back eventually. Not claiming whether US should strive to pay out most debt, but that may help explain the people’s intuitions.