Is USA Government Debt Finally Under Control?

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You should be concerned with those who claim debt is subsiding, and therefore the government should continue high spending to stimulate the economy. Paul Krugman in a New York Times Op-Ed stated:

But after peaking in 2009 at $1.4 trillion, the deficit began coming down. The Congressional Budget Office expects the deficit for fiscal 2013 (which began in October and is almost half over) to be $845 billion. That may still sound like a big number, but given the state of the economy it really isn’t. Bear in mind that the budget doesn’t have to be balanced to put us on a fiscally sustainable path; all we need is a deficit small enough that debt grows more slowly than the economy. To take the classic example, America never did pay off the debt from World War II — in fact, our debt doubled in the 30 years that followed the war. But debt as a percentage of G.D.P. fell by three-quarters over the same period. Right now, a sustainable deficit would be around $460 billion.

The surprise for most is that Professor Krugman is correct in what he said.  The reality is that there are a few big but’s.  Here are four reasons to be concerned with any rationale which says debt build issue is behind us.

1. Since 1965 Debt Size Does Correlate with Debt Percent of GDP

There is a very high correlation between size of debt and percent of GDP.

2. Debt Constrains Economic Performance?

There is enough evidence that sovereign debt constrains economic performance. From Debt Overhangs: Past and Present (Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff):

We identify 26 episodes of public debt overhang–where debt to GDP ratios exceed 90% of GDP–since 1800. We find that in 23 of these 26 episodes, individual countries experienced lower growth than the average of other years. Across all 26 episodes, growth is lower by an average of 1.2% . If this effect sounds modest, consider that the average duration of debt overhang episodes was 23 years.

3. Economic Forecasts Never Forecast a Recession

The Great Recession ended in 2009.  When will the next recession hit?  According to the Congressional Budget Office’s data which Professor Krugman used – never.  This just does not stack up against history. (hat tip to Wikipedia for table below):

Time Between Recessions in the USA

Name Dates Duration (months) Time since previous recession (months)
Great Depression Aug 1929 –
Mar 1933
3 years
7 months
1 year
9 months
Recession of 1937–1938 May 1937 –
June 1938
1 year
1 month
4 years
2 months
Recession of 1945 Feb–Oct 1945 8 months 6 years
8 months
Recession of 1949 Nov 1948 –
Oct 1949
11 months 3 years
1 month
Recession of 1953 July 1953 –
May 1954
10 months 3 years
9 months
Recession of 1958 Aug 1957 –
April 1958
8 months 3 years
3 months
Recession of 1960–61 Apr 1960 –
Feb 1961
10 months 2 years
Recession of 1969–70 Dec 1969 –
Nov 1970
11 months 8 years
10 months
1973–75 recession Nov 1973 –
Mar 1975
1 year
4 months
3 years
1980 recession Jan–July 1980 6 months 4 years
10 months
Early 1980s recession July 1981 –
Nov 1982
1 year
4 months
1 year
Early 1990s recession July 1990 –
Mar 1991
8 months 7 years
8 months
Early 2000s recession March 2001–Nov 2001 8 months 10 years
Great Recession Dec 2007 – June 2009 1 year
6 months
6 years
1 month

Recently recessions have occurred between 6 to 10 years following the end of the previous recession.  The probability is that the next big one hits between 2015 and 2019.  Where is the rainy day debt reduction? Again quoting Professor Krugman:

Smart fiscal policy involves having the government spend when the private sector won’t, supporting the economy when it is weak and reducing debt only when it is strong.

Professor Krugman goes on to argue the economy is not strong – which requires more government debt.  The problem is the next recession will hit without debt reduction and then the government will be forced to add to the debt because “the private sector won’t“.

4. Using Economic Growth Forecasts to Argue the USA Will Reduce the Debt

Economic forecasts are imaginary situations – and the longer the timeframe of the forecast, the more “Alice in Wonderland” it becomes.  Going back to the referenced CBO study, they predicted nominal gdp to hit 6% or better in years 2015 to 2017.  If one uses real GDP at 2% – the results are significantly different for the possibility of debt reduction.

Even if the CBO forecast is correct, the debt starts growing in 2018 with only and relatively insignificant reduction in the meantime.  Never even coming close to getting under 90% of GDP.  And who knows what the sequester talks will bring.


There is way too much evidence to believe it is safe for the government to go on a spending spree considering the current size of USA sovereign debt.  Yet Professor Krugman may be correct that a pulse in government spending might be needed to reignite the economy to levels last seen in the 1990’s.   The USA likely has few other choices than to nuke some or all of its debt to get it back to manageable levels, or simply stop accounting for it.

The large size of the debt is limiting economic options.

Other Economic News this Week:

The Econintersect economic forecast for March 2012 continues to show weak but somewhat improving growth. The supply chain contraction we saw last month has dissipated with all of our check methods of measuring the economy clearly in expansion territory.

ECRI now believes a recession began in July 2012. ECRI first stated in September 2011 a recession was coming . The size and depth is unknown. The ECRI WLI growth index value has been weakly in positive territory for over three months – but in a noticeable improvement trend. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

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Initial unemployment claims fell from 340,000 (reported last week) to 332,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here).

The real gauge – the 4 week moving average – also improved from 348,750 (reported last week) to 346,750. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

Weekly Initial Unemployment Claims – 4 Week Average – Seasonally Adjusted – 2011 (red line), 2012 (green line), 2013 (blue line)

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Bankruptcies this Week: Geokinetics,

Data released this week which contained economically intuitive components (forward looking) were:

  • Rail movements are somewhat improving.
  • retail sales – normally this is a lagging indicator, but our analysis is that the trend may be changing to the downside.

All other data released this week either does not have enough historical correlation to the economy to be considered intuitive, or is simply a coincident indicator to the economy.

Weekly Economic Release Scorecard:

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9 replies on “Is USA Government Debt Finally Under Control?”

  1. The past data might be correct, but it does not represent the future! Debt was not an issue for the U.S. after WWII, because the U.S. was the economic monopoly! Our economy grew exponentially!  That’s over now, thanks to the rise of BRICS. Where will our growth come from in the next decade? At 2%, we will not lower the unemployment rate at all. At this rate of spending, the deficit may be smaller than before, but it’s still very high, piling up on the debt, towards $17T, $18T, and $20T before 2016 … By then, we will have printed so much money that few will buy our treasuries …

  2. The first question is whether the Reinhart and Rogoff work applies to sovereign issuers of a fiat currency in a banking system based on fractional reserve credit. Virtually all of their data is from countries that were on a gold standard, or in a fixed exchange rate regime under Bretton Woods or were running a peg and borrowing in a currency not their own (of which Argentina is a classic example). If their thesis did apply to sovereign issuers of fiat currency with a responsive float, how does one explain Japan?
    The better explanation might be that whenever a country tries to run a budget surplus (perhaps because they think debt is too high) then growth is constricted. So the cause of the slow growth is not the debt level itself, it is the government sector austerity that follows.
    The second question is whether a country is better off with full(ish) employment maximising production and output rather than having significant underutilisation of resources including labour? (This leaves to one side the problems of an economy based on an assumption of perpetual growth economy and problems of limited resources, peak (cheap) oil and the like.) Surely the wealth of the country overall is maximised by fully utilising all existing resources rather than allowing a substantial pool of labour and productive capacity to sit idle because of insufficient government spending while the private sector stops borrowing/deleverages.
    Personally I would argue that the US has wasted an incredible opportunity to renew aged infrastructure and to invest in new infrastructure where inadequacies were causing inefficiencies both in economic and social terms. If you don’t renew infrastructure when interest rates are low, relevant plant utilisation is low and relevant labour is unemployed, when is the appropriate time to renew/expand infrastructure?

  3. @Inquisitive > when is the appropriate time to renew/expand infrastructure?
    Never!!!!! The U.S. infrastructure significantly expanded twice:
    (1) in the 1800s, when the labor was cheap, including slavery and the laborers from China.
    (2) in the 1900s, especially after WWII, when the US was the economic monopoly, virtually inventing and making everything and naming its own prices.
    Both situations are gone! Worse yet, the US has now more takers and givers, who want to work? With President wants to raise the minimum wage, who want to pay?
    The only reason we are still alive on life support is because we can print money. That’s good for 5 more years. That’s it! Reform or die!
    I have the most accurate diagnosis for America, as well as the best solution! For more, read “Saving America, Chinese Style” at! Enjoy!

  4. “There is enough evidence that sovereign debt constrains economic performance. From Debt Overhangs: Past and Present (Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff):”
    I don’t necessarily agree with that. I am not sure their sample was representative. And it is hard to separate cause from effect.And I see nothing special about sovereign debt. It is a small part of the capital structure of a nation.

  5. @SantaFeSteve  – i too do not believe it is representative.  however, there is no evidence to suggest that a high government debt is good for the economy.  my guess is that it provides a nice headwind to growth.  one point on studies in economics – it almost is impossible that any study’s conditions correlate to current conditions.

  6. @Inquisitive in my last life, mega infrastructure projects were my specialty. infrastructure is a not efficient in employment per dollar spent – and infrastructure has a very long planning and design cycle.  i believe a certain percent of the economy should always be spent on infrastructure building and renewal. that way you could always accelerate projects (like singapore did) when their economy slowed during the great recession.

  7. @econintersect  @Inquisitive > like singapore did
    Please stop using Singapore as an example for 2 reasons:
    (1) It’s too small, and hence hardly relevant to the U.S.. Besides, it’s so 20th century!
    (2) Use China instead! It’s totally relevant and it’s really 21st century!
    China’s infrastructure is massive, comparable to the U.S. in size, and totally new, all built over the past 30 years! Moreover, China’s high-speed rail will soon expand into South East Asia and West Asia (i.e. former Soviet Republics), and to Europe …

  8. @econintersect @Inquisitive I think it might depend on whether it is a developing nation or developed nation. And creating jobs is not normally a goal of investment but a cost to be avoided. In a developing nation infrastructructure (which is overhead) may create new opportunites for economic activity. In a developed nation, there are fewer situations where infrastructure (which is overhead) creates new opportunities.
    But infrastructure always creates opportunies for the political class. We need to worry about their welfare also.
    Maintenance of infrastructure is a different matter. It is very inconvenient when dams burst or bridges fall down. You do not maintain bridges and dams to create jobs. But their failure can reduce employment.

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